Government Borrowing

Well, the issue of additional stimulus is resolved. We keep hearing the term “trillion” being bantered about. How much is a trillion dollars? A trillion dollars is a million dollars multiplied by a million. Or if you prefer, a thousand billion. It has 12 zeroes: $1,000,000,000,000. That is a lot of zeros. Here is the kicker—the stimulus bill is just about twice that amount. To put this in perspective, the federal government normally spends between four and five trillion dollars each year.

Thus, the stimulus bill will increase this year’s budget by close to 50%. Again, that is a lot of spending. Here is the good news—that spending is one time only and afterwards the budget should return to normal, hopefully with increased tax revenue to help offset some of the deficit. That is unlike lowering taxes, which lowers revenue every year. Here is the bad news. The deficit created by the spending will cost the government billions of dollars every year in interest.

For example, in 2020, the government spent over $300 billion in interest. The more the government must borrow, the greater the risk that interest rates will rise and therefore increase these expenditures even further and may even slow the economy in the future. That is one risk of the stimulus plan. The other risk is inflation due to an overheating economy. Inflation can also cause higher rates. The risk of not spending the stimulus dollars? An extended period of recovery like we had after the Great Recession. So, let’s hope these dollars speed the recovery without overheating the economy.