Where Does $2 Trillion Even Come From?

Posted by Bethany Wood on Fri, Apr 17, 2020
Bethany Wood

Cash Money

Coronavirus relief stimulus checks have begun dispersing, and word has been circulating about giving out even more. These cash payments are part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act totaling $2,000,000,000,000.00. The act is broken down for multiple moving parts of this pandemic: stimulus checks, extra unemployment, loans for corporations and small businesses, health care, etc. However, this $2 trillion number has still left many reeling, wondering where this money is coming from or if this will cause inflation.

In a recent episode of NPR’s Planet Money, Economist Alan Blinder shares some insight on how the U.S. government obtains this money. Blinder is a professors at Princeton University and served as the Vice Chairman of the Board of Governors of the Federal Reserve System under Bill Clinton.2

There are essentially two types of money: money that already exists and money that has not yet been created. The U.S. government borrows money by issuing treasury bonds. Investors are regularly and frequently lending money to the government. Blinder explains that the reason an investor would choose treasury bonds over cash or gold is that treasury bonds are the “safest asset money can buy.”

With all the concern around the length of this pandemic and the fear of economic uncertainty, how can we know that these assets are still the safest? The interest rates are a tell-tale sign. The U.S. government can borrow money for ten years at an interest rate of less than one percent. Investors are willing to essentially give money to the government for little return on their part because they have so much trust in the government. If these investors were worried about the economic integrity at this point, they would charge a much higher interest rate. Simply put, if you’re only asking for less than a one percent return, you know you’re going to get your money back.1

The Federal Reserve is also buying tons of treasury bonds, which essentially means that the Fed is lending money to the government, too. “The Fed is going to do that to the extent it is necessary to keep interest from going up,” says Blinder, “if you went back to World War II, which is the last time we had to mobilize to where we have to mobilize now. In World War II, the Fed was very explicit that they were going to keep the interest rate on bonds very, very low for the duration of the war.” The Federal Reserve is going to lend money to the government essentially without limit. If you’re wondering where the Fed gets the money, it just creates it. Only the Central Bank has the power to do so. So, in short: the $2 trillion is coming from investors like you and me as well as the Federal Reserve System.

If you’re remembering back to your basic economics course, you might raise your eyebrows at the Fed creating hundreds of billions of dollars out of thin air. High school economics teaches that if a government prints too much money, inflation is inevitable. We’ve heard of instances of hyper-inflation, such as in Germany in the 1920s, which can cripple an entire economy. However, this is very unlikely to happen in America right now.

This happened a few years ago during the financial crisis, where the Fed created more money, and inflation was very low for years and years due to quantitative easing. Quantitative easing is defined as “a monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject money into the economy to expand economic activity.”3

But what happened, is the banks took that money and sat on it. It didn’t get out into the world for people to buy more things.1 And this time around, with record unemployment rates, it’s very unlikely that people are going to go out with this money and just buy a bunch of stuff, they’re going to pay off debt and put it away in savings. Taking away worries of hyper-inflation, there are still concerns about what’s going to happen in the next few weeks and months that might lead to inflation later down the road.

Blinder says the best case, or least bad, scenario is “that this epidemic passes through only once, there’s not a reprise as there was with the Spanish Flu in 1918-19. And so once people feel it’s safe to associate again, the pent-up demand comes back and we get what’s called a v-shaped recession—very sharp down, followed by a pretty sharp up-- and all of this plays out within a few quarters.”

In Blinder’s best case scenario, the Fed is probably gradually going to withdraw some of its emergency policies during the upswing, but not too quickly, because as this happens the demand for credit starts skyrocketing in all forms: credit cards, bank loans, mortgages. Having done everything they thought of to stimulate the economy, the biggest concerns will then be the pace at which the emergency measures at withdrawn. When the Feds start to reverse these emergency measure, that means the economy is getting better.

Regardless of these scenarios, though, this $2 trillion still gets added to the national debt. How, theoretically, does the government pay this back? By people going to work and paying their taxes. Right now, many aren’t going to work and are losing their jobs, and by extension not paying taxes. This bill actually makes it easier for the government to pay their debts in the long run, as it works to keep our economy, businesses, and citizens afloat during this time of uncertainty.



  1. Karen Duffin, host. Sarah Gonzalez, host. Jacob Goldstein, host. Alan Blinder, guest. “Where Do We Get 2,000,000,000,000?” Planet Money. 26 Mar. 2020. Retrieved from Apple Podcasts.

Topics: Banking

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