Other side of the Moon

President-elect Barack Obama is pushing forward a $775 billion stimulus package. $300B of that is going to low- and middle-income earners as tax cuts. That's great, isn't it? US economy is getting more money into the system at a time of historical economic downturn.

But wait. That is just half of the deal. The other half is this: $775B is taken from someplace else. That "someplace" is going to be $775B poorer. At a time of historical economic downturn, mind you. So where does the money come from? There are three places a government a get this money:

1. Taxes
2. Federal Reserve
3. Borrowing

There could be a fourth place and that is surplus in government budget, but that also is a result from taking it first from some of these places. And USA infamously has the massive deficit. So scratch that.

1. Taxes

Well, they are giving tax cuts as earlier mentioned, so this probably isn't going the be the method. And if they would, they would first tax the people, and the same money back. As ridiculous this sounds, it is basically how everything works. But it isn't done in the US. It's just not IN these days.

2. Federal Reserve

This is the government's most reliable weapon in it's arsenal. There is no way the Fed - at least under Bernanke's control - would ever refuse to loan money to the government. Even at extremely low interest rate. Wow, free money! Well why doesn't the government just ask the Fed to create $50 trillion and loan it, so we can get everything done at once; end the crisis, zero unemployment, huge space program on way and pave the freeways with pure gold? It's free money isn't it? And if you believe John Maynard Keynes (like most modern economists), it will create at least triple that amount of income in the economy, in stages. Excuse me while I briefly am the party pooper and say: in your dreams, baby.

What this method of obtaining cash can and will do is create inflation. Period. If you create more money than there are goods available, that is the only result. Are there more goods produced in USA? No. That is why they don't create that $50 trillion every day. Even Bernanke knows that.

Inflation makes everyone's purchasing power diminish. If they give everyone $400 tax cut, and they have to print that money, the effect is that goods cost more money and you lose the same $400 that way. This is just taking blood from the right hand and putting it into the left hand. Do you in effect have more blood in your veins? If you believe what you read in the newspapers everyday, then that is reasonable logic to you.

3. Borrowing

This the people understand a bit better. Government can borrow this money from banks, individuals and other governments. But as you know, this money has to be paid back. If you as an individual borrow money from a bank, is your overall economy that much stronger? Of course not. You haven't received any free money. Well, there are people who do loan money and never think about paying it back, just thinking that they got rich, wohoo! That is part of the problem why we are in this mess in the first place. 

In any effect, borrowing is what the US government will also try to do to obtain this money. I say "try" because it is increasingly difficult for them to persuade banks, individuals and other governments to loan money to US, because US is exactly that guy who keeps loaning money and never pays it back. Especially when the crisis that got started in America has now spread across the world, the would-be lenders have to tighten their belts and think twice who they loan money to. There are economists that think that this is going to be a huge problem.

Borrowing money will not create real wealth, unless you invest it really wisely to produce new wealth. If you just spend it on consumption, that money goes to China/etc. whoever manufactured the goods the people bought.

Conclusion

The media is fervently avoiding any sort of analysis or even mentioning the other half of the deal. Extremely rarely I see anyone in mainstream media talking about where the money is coming from and what are the effects of that. I mean, I could be totally wrong about what I have said about different ways of getting money and what are the result from them, but I think no one can deny that there is the other side of the Moon, and that it has as much real life effects than the visible side.