UNIDENTIFIED PERSON, BYLINE: This is PLANET MONEY from NPR.
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JACOB GOLDSTEIN, HOST:
Robert Smith, it's here. The bill is here.
ROBERT SMITH, HOST:
We got it.
GOLDSTEIN: It's 883 pages - more importantly, $2 trillion.
SMITH: It's the government's economic rescue plan for COVID, and we have never seen anything like this in our lifetime. It's hard to get your head around it. Everyone gets something. So if you're listening stuck at home, the U.S. government will probably be sending you a check for around $1,200.
If you've lost your job, you'll get even more cash. Small businesses get grants. Big businesses get loans. Hospitals, cities, states all get a lifeline - even alcohol manufacturers. Even alcohol manufacturers get a little tax break if they're making alcohol for hand sanitizer.
GOLDSTEIN: There's so many details in this bill. We're going to be covering it essentially for the rest of our lives. (Laughter) Yes. But for today, we just want to focus on the magnitude, on the $2 trillion - (in Spanish) cuatro comas.
SMITH: It is inconceivable, this number. And I don't mean this as in - oh, it's really big. I mean it is literally difficult to conceive of how big $2 trillion is. I've been trying to, like, get it through my head.
GOLDSTEIN: OK. I got one way to think of it. Two trillion dollars is about five weeks of U.S. GDP. So in other words, 2 trillion is about the value of everything everybody in America produces in about five weeks of work, which actually makes sense - right? - because right now, over the next five weeks, people in America are going to produce very little at work. So it's like the government is just stepping in to say, like, OK, we're going to try and make up for that.
SMITH: That is one way to think of it. Another way to think of it is - if the federal government were to pay this out $1 at a time - $1, $2, $3 - it would take 64,000 years to count out $2 trillion - 64,000 years.
GOLDSTEIN: Thank God they are not going to count it out $1 at a time. We don't have, obviously, 64,000 years. We don't even have one year. We may not even have months. We need the government to get that $2 trillion out as fast as possible.
Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
SMITH: And I'm Robert Smith. Today on the show, we're going to ask some pretty deep questions about this sum of money - $2 trillion. Where exactly is it going to come from? Will it create inflation? And will America ever run out of money?
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SMITH: I know I keep reading this number with an astonished voice. But I feel like I have to do it every single time.
GOLDSTEIN: Do it.
SMITH: Two trillion dollars (laughter). It just, like - it just stops me every single time. It is a lot of money. Obviously, if it saves the economy from collapsing into another Great Depression, it is worth every penny. So the No. 1 big question I think that a lot of people might ask when they hear $2 trillion - they know that the federal government does not have $2 trillion sitting around. The federal government is already in debt. So where are they going to get the money in the next few weeks?
GOLDSTEIN: So - OK, we can think of this in terms of two buckets - very, very big buckets.
GOLDSTEIN: One bucket is money that basically already exists out there in the world. The other bucket is money that is going to be created out of thin air.
SMITH: The magic bucket.
GOLDSTEIN: The magic bucket. I was afraid you were going to say that. Let's start with the money that is already out there in the world. Basically, the U.S. government is going to borrow money by issuing Treasury bonds. And this is something it does all the time. If you have money in a retirement account, you are probably lending money to the U.S. government whether you know it or not. Investors all around the world are, all the time, lending tons of money to the U.S. government.
SMITH: Yeah. But these are not normal times. The U.S. economy is functionally shut down. I worry about the integrity of the U.S. government. Why would investors around the world still give money in uncertain times to the U.S. government? Why would they lend money when they could just sit on cash or buy gold or something?
GOLDSTEIN: Yeah. So Robert, when we set out to work on this show, I called up Alan Blinder. He was the vice chair of the Fed back in the '90s. He's a professor at Princeton. And he's one of the smartest people I know on this stuff. And I asked him that question - like, why would people buy Treasury bonds right now?
ALAN BLINDER: There is a huge market for U.S. Treasury debt for the simple reason that it's considered the safest asset money can buy.
GOLDSTEIN: And this is a time when the safest asset money can buy sounds really good.
BLINDER: You bet.
SMITH: You know, I understand this, Jacob, and we say this all the time - the strength of the U.S. Treasury bond is that it is the safest asset. But in my heart, I do question whether there are $2 trillion worth of takers out there ready to stand in line for this asset when we need it the most. How do we know it's still true?
GOLDSTEIN: You know the answer. Say it.
SMITH: You're going to talk about interest rates?
GOLDSTEIN: You bet. So right now, today, the U.S. government can borrow money for 10 years at an interest rate of less than 1% a year. Right? So this is trillions of dollars of smart investor money begging to lend money to the government at a super, super, like, historically low interest rate - basically, giving the government money for free because they trust the government so much - because they are desperate to lend to the U.S. government.
SMITH: Because if they were worried at this point - like, literally, if they were worried today about the U.S. government, they would charge a much higher interest rate. And you only have to look back at the euro crisis in Greece. When Greece needed money, investors demanded a very high interest rate, the same with Argentina. Any of these countries in trouble, if you're going to lend them money, you're going to ask for 10%, 15%, 20% return. If you're asking for less than 1% return, you know you're going to get your money back.
GOLDSTEIN: Yeah. I mean, it is still one of the safest loans you can make on the planet. Even with all the debt, people trust the U.S. government with their money.
SMITH: And if I were to wake up one morning during this crisis and find that the U.S. Treasury interest rate had skyrocketed?
GOLDSTEIN: So that is probably not going to happen. And the reason it's probably not going to happen is actually, like, the next whole sort of chunk of the show - right? There's big...
GOLDSTEIN: Oh, it is the other bucket, yes. It is the unfortunately named magic bucket. Right? That is the money-created-out-of-thin-air bucket. So now is the part where we talk about the Fed - the Federal Reserve, America's central bank.
SMITH: (Imitating trumpet).
GOLDSTEIN: Is that the Fed cavalry?
SMITH: The cavalry coming in.
GOLDSTEIN: So you and I did a show last week about the Fed, right? So just to be clear, the bill we're talking about today - the $2 trillion - that's Congress, right? Congress is in the middle of passing that bill. The president is almost certainly going to sign it. That's, like, one whole set of things. OK?
The other big thing going on in the world - the other big response to this crisis in America, at least economically and financially - has come from the Fed. The Fed is doing a bunch of things. But what's important for this show is the Fed is buying tons and tons of Treasury bonds, which is to say, the Fed itself is lending hundreds of billions of dollars to the U.S. government.
And you know, one question I had here for Blinder is, but wait - if everybody around the world is so eager to lend to the government, why does the Fed need to be getting in on doing it, too?
BLINDER: The Fed is going to do that to the extent it is necessary to keep interest rates from going up.
SMITH: So in other words, if everyone in the world is clamoring to lend money to the U.S. government and interest rates stay low, that's great. But if people get nervous about the United States, then the Fed is there to keep buying to keep that rate low.
BLINDER: I'll give you an example.
BLINDER: If you went back to World War II, which is the last time, really, we had to mobilize the way we have to mobilize now...
GOLDSTEIN: It does feel like - right? I keep coming back to World War II. I...
BLINDER: Yeah, you should.
GOLDSTEIN: Yeah, yeah.
BLINDER: So in World War II, the Fed was very explicit that they were going to keep the interest rate on government bonds very, very low for the duration of the war.
GOLDSTEIN: And that's more or less what they're doing now?
GOLDSTEIN: This time, it's the war against the virus.
BLINDER: Yes. Hopefully - well, it'll be a much shorter war. But it's...
GOLDSTEIN: We hope so, yeah.
The Fed has said it's going to lend money to the government without limit...
GOLDSTEIN: ...More or less.
GOLDSTEIN: Where does the Fed get the money?
BLINDER: Oh, that's the neat part about being a central bank. It doesn't have to get the money. It just creates the money, something you and I wish we could do. But...
BLINDER: ...Only the central bank can do that.
GOLDSTEIN: So all of this money, these hundreds of billions of dollars the Fed is going to essentially lend to the government by buying bonds - is that, like, new money that the Fed is creating?
BLINDER: Yes, this is new money. That's why it's sometimes - we still sometimes use the phrase printing money. But this is electronics.
GOLDSTEIN: Hand over dollar bills to people...
BLINDER: No, no.
GOLDSTEIN: ...In exchange for pieces of paper that say Treasury bonds on them?
BLINDER: No, no, paper money will be irrelevant to this whole thing.
SMITH: So to recap, the $2 trillion stimulus rescue package is being paid for by investors like you and me, investors all over the world, as well as the Fed making sure that everything runs smoothly and interest rates remain low.
GOLDSTEIN: Yeah. And what that last part means is the Fed creating hundreds of billions of dollars out of thin air and using them to buy bonds.
SMITH: Now, this is where I start to worry a little bit because I remember when I took high school economics, which was my last sort of formal economics training...
SMITH: ...The one thing they taught us - the one thing they taught us was if you print too much money as a government, the thing that inevitably happens is your money, which is flooding into the system, becomes worth less. And you start to see inflation.
GOLDSTEIN: Hyperinflation, even - this is the story you're told.
SMITH: Hyperinflation. They always tell the story of Germany in the 1920s, wheelbarrows full of money; Zimbabwe with its trillion-dollar bank notes - hyperinflation that cripples the entire economy. You can't even put a price tag on an item because it will go up in two minutes.
GOLDSTEIN: And I mean, the short version of what happens is ordinary investors - the people in that first bucket - get scared about lending money to the government. So the central bank - that second bucket - they start printing more money to lend to the central government. And then investors get even more scared, so the central bank prints more money and more. And it turns into this spiral, where inflation just goes up and up and up and gets totally out of control and completely destroys money, basically.
SMITH: And that's where you get this crazy, runaway inflation with prices doubling every week. And the value of money completely breaks down.
GOLDSTEIN: So that's the story. And I want to say just as clearly as possible - that is very, very, very unlikely to happen in America right now. Blinder says that basically every non-fringe economist says that. And there are good reasons to think that hyperinflation is very unlikely. One of the clearest is something that happened just a few years ago. Robert, you covered this a lot - right? Right after the financial crisis, the Fed did another version of this. They called it quantitative easing. They printed vast quantities of money, created vast quantities of money out of thin air, used it to buy government bonds.
SMITH: And people at the time said, whoa, whoa, whoa, you're going to create hyperinflation in the United States of America.
GOLDSTEIN: Did not happen, right? Inflation was actually very, very, very low for years and years after quantitative easing. And so it's really useful to think about why that happened, right? And I think there is this sort of intuitive sense, really, that - well, if the Fed is creating more dollars, there's going to be more dollars out in the world. Therefore, people are going to be going and whatever - buying more canned beans or more cars or whatever. And the price of things are going to go up because so many people are out there buying stuff.
But that is not the way this works - right? - because what actually happens is when the Fed is buying these Treasury bonds, what they are doing is creating the money and then buying the Treasury bonds from banks, right? The banks have a Treasury bond; they sell it to the Fed. Now the banks have more money. But what happened after QE is the banks basically just took that money and sat on it. It just sat there in the banks. It did not get out into the world for people to buy more stuff and bid up prices.
And if you think about right now - the Fed is once again creating all this money - I mean, yes, obviously, you know, there's runs on a few little items. Maybe people are going to be paying more for toilet paper. But if you think of the massive unemployment that's happening right now, all of the huge economic stuff that's happening, it seems very unlikely that people are going to go out into the world and start buying tons of stuff right now and driving up inflation.
SMITH: No, they're going to pay off their debts or just pay their rents...
GOLDSTEIN: Or just pay their rents, exactly.
SMITH: So I can leave hyperinflation back in my high school economics class - not going to happen this time.
GOLDSTEIN: I think so.
SMITH: But there are still scenarios that are worrisome and troubling that could actually happen, that I should lose some sleep over.
GOLDSTEIN: Yes. Although, I should say, relative to what's likely to happen in the sort of real world in the next few weeks, they seem not that awful. But sure, they're worth talking about here. So let's think about this. Let's say it's, like, six months from now - like, you know, fall of this year, Thanksgiving-of-this-year-ish. The worst of the virus has passed, but a lot of companies are still in trouble. Unemployment is still pretty high. It's still maybe hard to get some products - supply chains are still weird. But things are starting to get better. You know, more people are going back to work.
And there's all this new money out there, right? People are starting to get loans again. They're buying more stuff. And so now we are starting to see some inflation. Prices are going up. So now this combination of high unemployment and rising inflation, it's called stagflation, and it puts the Fed in a really tough spot.
SMITH: Yes - because normally when unemployment is high, the Fed will want to keep interest rates low to stimulate the economy so people and businesses will borrow and spend and hire.
GOLDSTEIN: Yeah - so they have that impulse to keep rates low. But because inflation is going up, they actually also want to raise interest rates so that people stop borrowing and spending so much and, you know, driving inflation.
BLINDER: Then the Fed is in a terrible dilemma because it can help on one front only by hurting on the other.
GOLDSTEIN: And like, the Fed is kind of screwed in that situation - right? - because, like...
BLINDER: Yes. The Fed is screwed, as you say, to use the technical term.
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BLINDER: What it's facing then is you can't push and pull at the same time.
GOLDSTEIN: Right, right.
BLINDER: You either have to push or you have to pull...
BLINDER: ...Or neither. But you can't get it right on both ends.
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GOLDSTEIN: In a minute, what is the least bad outcome we might see?
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GOLDSTEIN: OK. So we did the very bad, probably not going to happen story of hyperinflation. We did the plausibly bad stagflation story. Obviously, the present is very bad and is going to be very bad. Is there some - what's the least bad outcome you can think of, you know, from the point of view of kind of money and inflation...
GOLDSTEIN: ...And spending?
GOLDSTEIN: Like, what's the least bad version of the story?
BLINDER: Yeah, I can answer it because I'm praying for it. The least bad 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-shape recession - very sharp down followed by a pretty sharp up. And all of this plays out within a few quarters.
GOLDSTEIN: A few quarters meaning six months?
BLINDER: Two, three - yeah, two, three quarters.
GOLDSTEIN: So that's still many months. That's still - so in that universe as - when you're on the upswing of the V, then, what is the Fed doing?
BLINDER: It's probably gradually as - and this is the art rather than the science - withdrawing some of its emergency policies but not too quickly 'cause what you're going to see, when we get on the upside, is the demand for credit starts skyrocketing.
GOLDSTEIN: Everybody wants to borrow.
BLINDER: Yeah, credit cards get used. Bank loans get used. People start buying houses again and mortgages. So the Fed's job then, I think, will - the Fed will then basically look back and say, OK, we did everything we could possibly have thought of to stimulate the economy a few months ago. And now our operational question is at what pace and in what particulars to withdraw the emergency measures.
GOLDSTEIN: Which - like, that's a good problem to have. That's the problem we want the Fed to have.
BLINDER: Yeah, yeah. Exactly. I mean, it's a difficult problem for them, but let them worry about it.
GOLDSTEIN: (Laughter) Yeah.
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BLINDER: It means that the economy is getting better.
SMITH: When the Fed starts to reverse this process - the process we've talked about during this whole episode - it does leave one thing behind. The money that the U.S. government borrowed from me and you and investors and the Fed - that $2 trillion - no matter what, that gets added to the national debt. And in theory, someday the U.S. government has to pay that money back eventually.
GOLDSTEIN: That's true. I mean, it is useful to think that the government already owes many, many trillions of dollars in debt, right?
SMITH: (Laughter) It's used to it. yes.
GOLDSTEIN: And the way it pays back that money is people in America go to work and pay their taxes, right? And right now, with the economy collapsing, nobody is going to work. People are losing their jobs. They're not going to pay taxes. So to the extent this $2 trillion prevents a complete economic collapse, it is actually going to make it easier in the long run for the government to pay its debts.
SMITH: Fix the problem that is sitting right in front of you and, hopefully, tomorrow's problem will be less of a problem when we get there.
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SMITH: I just want to thank you, the listener, for bearing with us as we have sort of different schedules, different styles, different formats, different sounds (laughter) coming in behind us. We appreciate it. Let us know what you're seeing out there in the economy. We are email@example.com or @planetmoney on Twitter and Instagram.
GOLDSTEIN: Our show today was produced by Nick Fountain. Bryant Urstadt is our editor. Alex Goldmark is our supervising producer.
SMITH: As I've been stuck in my apartment, I have been delighted to get recommendations on movies and podcasts from my friends. So if you like this show, send it on to a friend. Let them listen.
I'm Robert Smith.
GOLDSTEIN: I'm Jacob Goldstein. This is NPR. Thanks for listening.
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