There is a lot of misunderstanding here. Most Americans, including most politicians, yourself and all but a handful of ET posters believe that taxes furnish the revenue the government uses to buy what it wants, and when there is not enough revenue the government borrows the difference from the private sector. This is wrong in fundamental ways that renders premises dependent on these false beliefs incorrect.
The first step is to correct the misunderstanding of what occurs in deficit spending:
a) Tax revenue allows the government to obtain goods and services and make transfer payments, but when revenue is not enough to cover these expenses the government does not borrow any money, it prints the money it needs to cover the revenue shortfall. Then later Treasury Securities are sold in principal amounts equaling the amount of new money spent into the private sector.
b) Government Issued Securities* are structured like debt instruments. When the government sells securities to the private sector, the transaction has the outward appearance of borrowing from the private sector; yet no net, true borrowing is occurring (vide infra). Some government's do have real debt, but not the U.S. Government.
b) Government Issued Securities* are structured like debt instruments. When the government sells securities to the private sector, the transaction has the outward appearance of borrowing from the private sector; yet no net, true borrowing is occurring (vide infra). Some government's do have real debt, but not the U.S. Government.
According to a commonly held, but incorrect, viewpoint, if the government wants to engage in deficit spending, it first borrows the money and then buys what it wants with the borrowed money. The net result, ceteris paribus, would leave the private sector with exactly the same money supply it had before the transaction but richer by a bond, .i.e., the total money in the private sector would increase by the bond principal. (Recall bonds are not a part of the money supply but are a part of total money).
In actual practice however, deficit spending is covered by "printing" of new money. The new money appears in the Private Sector Economy simultaneously with goods and services moving to the Government sector. This causes the money supply to be increased (temporarily) by the amount of Goods and Services sold to the government while Goods and Services move to the Government Sector. But THEN the government sells bonds to the private sector, moving the newly printed money right back to the government side. The Government now has the "cash" needed to pay off the Principal on the bond it just sold. How was the "cash" acquired? It was created out of thin air, i.e., it was "printed!
THERE IS NO REAL BORROWING of principal going on because the Goods and Services were bought with printed rather than borrowed money!!! Then, when later the Government sells a bond to the private sector, the net result of the Government's transaction leaves the private sector richer by a bond, and the Government "richer" by the money it just printed! It is as though the Goods and services were bought with a bond. This increases the money total in the private sector although the money supply is left unchanged. The Government ends up with the newly printed money on its books.
I don't want to get into the reasons why the government chooses to print to cover deficits rather than borrow, but suffice it to say that bonds do not serve the purposes that most think they do. The government issues bonds for entirely different purposes then the raising of money to spend. This is a topic for another time.
So, back to QE. Anyone who can understand what I have posted above will immediately understand why QE is not printing. Instead, it consists of the interchange of Treasury Securities for transactional money. The purpose of QE is to increase bank reserves, put downward pressure on rates, and simultaneously facilitate large deficit spending. In contrast, by following what happens in typical deficit spending, as described above, one can understand why deficits don't normally lead to ballooned reserves and "easy money", nor do they lead to inflation.
Bernanke once "misspoke", and in an unguarded moment during an interview said he was "printing." I'm sure he'd take that back, if he could. As the interview's context was QE, it would have been easy for listeners to conclude that QE was causing the printing. He was printing like crazy on behalf of the Congress**, but QE was the causing printing, it was the other way around.
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*Here I am using the shorter, more convenient word "bond" to stand for any Government Security sold by the Treasury, including bonds of course.
**Only the Congress can print new money. The Fed normally has no say in the amount printed. They just facilitate the "printing" on behalf of the Congress.
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