Why Stimulus Checks?

By Aiden Cho

Written Sun April 11, 2021

Updated 9:52 PM ET, Thur April 11, 2021

 

With the ongoing COVID-19 pandemic, Americans have been introduced to stimulus checks, with the third one having been sent out recently. Anyone who makes less than $75,000 a year is eligible for $1200 checks. However, before we get to its importance to our economy, it is essential to understand how the government creates stimulus money in the first place. 

Although checks are passed out once Congress approves them, the process itself is not that simple. Money does not entirely come from printing. Instead, most of it is sourced from federal borrowing. The Treasury Department is in charge of the process, borrowing money by selling treasury bills and bonds to both public and private sectors and foreign entities. The government pledges to pay back with a small interest. Then they use that money to support people, in this case, stimulus checks. 

Stimulus checks bring a lot to the economy. For example, they encourage employers to keep people employed, therefore, stimulating people to spend. The borrowed money is used on stimulus programs to maintain cash flow. With the economy running, people deposit their earnings in banks. As a result, banks lend your money to others for loans, making a profit off interest rates. A portion of the profit off interest will go towards the depositor. As you can see, keeping people employed results in various economic benefits.

Since the government has more flexibility with finance than individuals, they can borrow more than what they can afford to make the economy bigger. However, there is another source of finance. The Federal Reserve, commonly known as the Fed. The Fed can raise funds to purchase treasury securities by simply printing money. It doesn’t literally mean printing physical banknotes. Rather, it is more of selling bonds while the treasury gets the real money in exchange.

The risky side of stimulus checks is the increase in interest rates, making it harder for private companies and individuals to borrow and invest. As a result, investment securities like insurance, the stock market, and real estate suffer. Another common criticism is that it will lead to currency inflation; therefore, the country could experience an economic collapse, like Venezuela. Fortunately, the United States does not need to worry about such problems. Venezuela suffered because of its weak economy and over-reliance on one industry, oil. Contrastingly, the United States’ economy is already so stable that excessive printing to some extent will not be a problem as people will still have places to spend to maintain cash flow. The idea of cash flow is very important because even if the government prints out an excessive amount of money, a strong economy with many places to spend will prevent people from simply storing their money and disrupting the supply and demand relationship. More money available with fewer places to spend will greatly increase the supply of banknotes, devaluating the value of the currency. 

One question still remains. What happens if we keep on passing stimulus bills? Well, it is quite simple. As long as there aren’t oil shocks, stock market crashes, and subprime mortgage crises, the United States will not simply go bankrupt. Stock markets and real estates are vital to the economy because as I mentioned in the previous paragraph, these markets supply the economy with cash flow. Essentially, if there are a lot of dollars floating around in the public, there needs to be a place for people to spend. Yes, people can use their cash at department stores and such but it cannot match the financial caliber of the stock market and real estate. People spend big in these markets. Real estates are traded in a region of hundreds of thousands of dollars and billions of dollars are exchanged every day in the stock market. The financial magnitude of these is so big that if one does indeed crash, people will panic sell, and liquidate their assets, leaving you with a surplus supply of cash in the economy with nowhere else to spend.

Aiden Cho

Writer - Mezo Inc.