You are misunderstanding the order of operations. Any money the government collects in taxes is money it has already spent into the economy. How can it be any other way? The government spends by debiting its own account and crediting private accounts. You are implying that the government is borrowing back money it has already spent in order to ‘fund’ further expenditure. This is a contradiction.

The Fed’s open-market operations are performed to hit its target overnight interest rate by draining (or adding) reserves. Nothing more. Ultimately, t-bonds are high-interest savings accounts at the Fed that hedge the portfolios of those that own them (banks, pension funds etc). The interest they generate is effectively a government handout.

Here is an explanation (not from me):

The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system. So, when the government auctions bonds they are merely targeting reserves in the system. This action is mandated by Congress as an accounting tool and so is seen as a source of funding, however, in reality the Central Bank is merely draining reserves that the Treasury already spent into existence — reserves that were deposited at various banks. Therefore, it’s incorrect to argue that there won’t be buyers of U.S. bonds — with the banks earning 0.25% on their reserves and the government offering anything above that (depending on duration) the trade is a no-brainer for the banks who hold these reserves. The government is basically offering them free money and the Central Bank keeps control of the money supply in exchange (at least in theory). What is not occurring is some sort of funding mechanism. The Fed could care less if the auctions are 2X, 3X or 4X oversubscribed. They don’t get extra money when this occurs. They don’t get a gold coin that can then be spent. So long as they meet the 1:1 bid to cover the auction is a huge success because they drained their targeted reserves and convinced Congress that we aren’t going bankrupt.

Government spending is not necessarily inflationary. It depends on the real conditions of the economy and the real assets produced with those funds. Simply looking at “money supply” is totally insufficient for understanding price changes over a period.

Corporate accountant and former auditor with degrees in philosophy and accounting.

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