The government can’t find people to buy their debt anymore. China and sovereign funds around the world had been the main buyer since the spending orgy of the Bush administration. They no longer want to buy our debt however, since they think we won’t pay it back…

Thus, the government has started playing gamese They are devaluing the currency. The Federal Reserve, a private company, is buying government bonds. The federal reserve gets all of its funds from the Treasury. The treasury… prints the money.

I have a thought about this though. I realized that the massive inflation that this caused is not the worst outcome that we can get from government, and it’s actually better than one of the other likely outcomes from out of control spending in government. Inflation is basically a flat tax on everyone who has money. There are X dollars in the economy. If you print X more dollars, then you’ve taxed all of the existing dollars at a rate of 50% no matter what that person earns or owns. 

Look at this graph, showing the supply of money in the system…

Much worse would be to make our tax even more “progressive” taxing those who create jobs while creating an ever growing percentage of people who not only don’t pay taxes, but often get more money back from the IRS than they put in. 

So while I hate that the government has been spending like drunken democrats for the last 8 years, at least they’re funding part of it equitably.