With the collapse of several banks in the last few weeks, many fear that their deposits aren’t safe and another financial crisis is looming. Worse, the fight in Washington over raising the debt ceiling threatens to strain the system still more. These two issues may seem worlds apart, but both flow from the same source: excessive government spending.
Beginning in 2020, Congress suspended the debt ceiling limit on government borrowing and began spending trillions of dollars that it didn’t have – and that was atop the existing budget deficit. Like a family living beyond its means and running up credit-card debt, the government borrowed the money by selling bonds.
But the government not only borrowed trillions, it printed that much money at the same time. To prevent the new government bonds from crowding out private borrowing and driving up interest rates in a recession, the Federal Reserve essentially created the money for the government.
