Episode 1: Where Does That Stimulus Money Come From?

Thank you for joining me for Episode 1 of my NEW Money Wisdom Question Series, where I film answers to common financial and retirement investment questions in 2 Minutes or less. Today I want to talk about where that stimulus money came from.

The stimulus money comes from two different places. It comes from our United States Treasury, and it also comes from the Federal Reserve. So let’s talk about those two different pieces of stimulus.

Stimulus Money Part I: The U.S. Treasury

The U.S. Treasury borrows money from investors. They sell treasury bonds and they take that cash that they receive in exchange for the sale of the bond and put it back out into the economy. They’re not printing money, which is a common misconception. It’s not quite like that.

They’re borrowing the money from anyone who buys a government bond. I can loan the treasury money and buy a $10,000 government bond and they can take that money and put it back out into the economy in the forms of the stimulus that’s going on right now during the Coronavirus.

We have to pay that money back some time, so it’s a debt that the American taxpayer now has to carry the burden of. But, at the same time, we’ve got to get money into this economy quickly because we don’t want the economy to seize up. It’s like a river – if you dam it up, everything downstream dies. We don’t want that to happen.

Stimulus Money Part II: The Federal Reserve

The other part of stimulus is what our Federal Reserve (The Fed) is doing. A lot of people hear about The Fed and wonder, “What is The Fed?”

The Fed is simply a bank called a central bank. It’s run by the U.S. government – indirectly, actually. The Federal Reserve will buy bonds and things like that from the open market to get cash out into the economy.

So let’s say I’m an investment bank – I own bonds and I need cash. The Federal Reserve will step in and buy those bonds creating what’s called liquidity in the market. Again, the idea is to keep that river flowing – keep that money circulating through the economy.

Thanks for joining me and I hope you found this information helpful!

P.S. If you enjoyed this topic and you want to hear more, you’ll love this podcast episode I recorded where I talk about the very same subject, in more detail.

P.P.S. Feel free to submit questions here for a chance to have them answered!