More FAQS on deficits and debt: Where is the money coming from?

by nyljaouadi1
0 comment


Former Federal Reserve Chair Alan Greenspan told CNBC last week that his “biggest concern” in regard to the economic outlook included too-high budget deficits. This concern is both completely misplaced, but widely expressed.

We have already addressed a number of FAQs about deficits and debt. Besides those FAQs, however, another common question people ask is “where is the money the government borrows coming from?” Related to this fear is concern that the source of borrowing (whatever it is) might dry up at any time, and, the result could be spiking interest rates that force firms to cut back on investment in productive private-sector investments, which in turn would slow economic growth in the future.

The short answers to these concerns are pretty simple: the money the government is borrowing comes mostly from ourselves, and that’s a key reason why we can be sure that interest rates won’t start rising unless and until we have reached a full recovery.

Below, we’ll explain what it means that federal budget deficits mostly amount to U.S. households borrowing from themselves.

In March and April this year, whole industries where U.S. consumers spend money were shut down (restaurants, hotels, air travel, gyms, etc.). While there are some substitutes for some of this spending (when restaurants close, people tend to spend more money on groceries, for example), these offsets are nowhere near one-for-one. This means that as the places where people spend lots of money closed, households spent less. Because one person’s spending is another person’s income, as household consumption spending collapsed, market-based incomes collapsed in turn (i.e., workers in COVID-19-shutdown sectors stopped getting paychecks and business owners stopped earning profits).

Absent any policy response, a horrific vicious cycle would’ve started. Laid-off restaurant and airline workers would’ve cut back spending on everything—including spending in sectors that COVID-19 had not directly shut down. At that point, workers in non-coronavirus-affected sectors would have seen cuts to their incomes and reduced their own spending—and the downward cycle would continue. The few months of significant economic support provided by the CARES Act starting in April didn’t just provide vital income support to laid-off workers—it also broke this vicious cycle and put up a firewall between the coronavirus-driven shutdowns and the rest of the economy.

The CARES Act was forecast to increase the federal budget deficit by just under $2 trillion. Concretely, this means that the U.S. Treasury had to issue bonds in this amount. When people express worries about where the money comes from for the government to borrow, or if rising deficits will lead to spiking interest rates, they are concerned that there will be no willing buyers for U.S. Treasury bonds at going interest rates, and that the Treasury will have to raise rates to find buyers for new debt. But since March, even as the supply of bonds exploded, interest rates have fallen sharply.

How did this happen? Apparently a huge source of new demand to buy Treasury bonds emerged starting in March. Where did this new demand for Treasury bonds come from? From the huge increase in household savings that was the flipside of the collapse in household spending. Households not experiencing income losses in March and April had far fewer opportunities to spend money as whole swathes of the economy shut down, so, their savings increased dramatically.

The figure below shows the personal savings rate up to the second quarter of this year—April, May, and June.

U.S. households supplying the money borrowed by the federal government: Personal savings rate, 1979–2020

Personal savings rate
1979 11.1
1979 10.4
1979 9.9
1979 9.8
1980 10.1
1980 11.3
1980 11.4
1980 11.4
1981 10.9
1981 10.9
1981 12.3
1981 12.9
1982 12.3
1982 12.5
1982 12.3
1982 11
1983 11
1983 9.8
1983 9.5
1983 10
1984 11.1
1984 11.3
1984 11.7
1984 11.3
1985 9.3
1985 10.2
1985 8.2
1985 8.9
1986 9.3
1986 9.5
1986 8.5
1986 8.1
1987 8.9
1987 6.8
1987 7.5
1987 8.5
1988 8.3
1988 8.6
1988 8.6
1988 8.5
1989 9
1989 8.3
1989 8
1989 8.3
1990 8.3
1990 8.7
1990 8.3
1990 8.2
1991 8.7
1991 8.6
1991 8.6
1991 9.4
1992 9.6
1992 9.9
1992 9.3
1992 8.9
1993 8.8
1993 8.3
1993 7.4
1993 7.3
1994 6.8
1994 7
1994 6.8
1994 7.1
1995 7.6
1995 6.9
1995 6.8
1995 6.6
1996 6.7
1996 6.5
1996 6.6
1996 6.4
1997 6.3
1997 6.6
1997 6.1
1997 6.3
1998 7.4
1998 7
1998 6.7
1998 6.1
1999 6.1
1999 5
1999 4.5
1999 4.5
2000 4.9
2000 4.9
2000 5
2000 4.4
2001 5
2001 4.6
2001 6.5
2001 4
2002 5.9
2002 6.2
2002 5.5
2002 5.6
2003 5.4
2003 5.5
2003 5.8
2003 5.3
2004 5
2004 5.4
2004 5
2004 5.1
2005 3.4
2005 3.1
2005 2.5
2005 3.4
2006 4.2
2006 3.9
2006 3.5
2006 3.7
2007 4
2007 3.9
2007 3.5
2007 3.3
2008 3.9
2008 5.6
2008 4.3
2008 6.1
2009 5.9
2009 7.2
2009 5.6
2009 5.7
2010 5.9
2010 6.7
2010 6.8
2010 6.8
2011 7.4
2011 7
2011 7.1
2011 7.2
2012 8.2
2012 8.9
2012 8.1
2012 10.2
2013 6
2013 6.6
2013 6.7
2013 6.3
2014 7.1
2014 7.4
2014 7.4
2014 7.5
2015 8
2015 7.5
2015 7.3
2015 7.4
2016 7.4
2016 6.8
2016 6.6
2016 6.6
2017 6.9
2017 7.4
2017 7.5
2017 7
2018 7.7
2018 7.8
2018 7.9
2018 8.1
2019 8.4
2019 7.3
2019 7.2
2019 7.3
2020 9.6
2020 26
ChartData Download data

The data below can be saved or copied directly into Excel.