The myth of all-tax-funded government spending

While catching up over the holidays, my father and I began to talk politics, as we often do nowadays.  

We bemoaned recent government financial blunders such as the Green New Deal, two proxy wars, and welfare for the unprecedented number of illegal migrants pouring across the Southern border.  My father concluded our talk by saying, “And our tax dollars are paying for it!”

I nodded.  As an American, this is something I’ve often heard throughout my life from disgruntled uncles and cantankerous grandfathers –even from my own mouth as I’ve gotten older.  

Despite being a perennial gripe, I had never seriously considered the idea.  Why would I?  Aside from being frequently repeated, it sounds all too logical.

But, in reality, it’s questionable if much of our tax dollars are really being spent on political misadventures.  

Looking at historical metrics, it’s clear that taxes have been relatively static for almost two decades, which cuts against the idea that American taxpayer money has funded our many financial black holes.  

In fact, some tax brackets even decreased with the Trump tax cuts. 

To put it bluntly: Our tax dollars are not funding America’s financial largesse. 

Instead, we fund it in an even less honest way, by printing currency and heaping it onto a $34 trillion pile of national debt that has little chance of ever being paid back.  Uncle Sam can pull off this sleight-of-hand without causing domestic inflation because the greenback is needed for trade by the rest of the world.  This demand allows the U.S. to send about 60% of all currency created to our international trading partners.  We effectively export our inflation to the rest of the world, which insulates Americans from price shocks we would otherwise experience had all that new currency stayed home.

This trick was revealed by the COVID-19 stimulus.  

Massive quantities of newly created dollars remained in-house — funneled directly into the pockets of American spenders to tide them over during the economic shutdown.  As we now know, this was clearly a recipe for significant domestic inflation — something Americans wouldn’t accept. 

The real question is: When will the rest of the world finally refuse to subsidize Americans’ unearned standard of living by accepting our ever-increasing glut of dollars? 

In recent years, Uncle Sam’s money printer has been working overtime.  The Federal Reserve added more than $12 trillion to the base money supply between February and June of 2020.  That’s more than four times as many dollars than has ever existed in just five months, and it didn’t stop there.  At its peak, base money hit $20 trillion before receding to $18 trillion.  More frightening than the growth of the money supply is the rate at which it has grown.

In 1971 the national debt was $400 billion.  In 2001 it was $5.7 trillion–a $5.3 trillion increase in 30 years.  From 2001 to now we’ve reached $34 trillion–over $28 trillion in just 23 years.  Our debt isn’t just increasing; it’s increasing exponentially. 

Some of our trading partners have grown tired of their foreign exchange reserves being devalued by America’s belligerent monetary policies.  Saudi Arabia, Russia, and China have expressed a willingness to trade in alternative currencies; the BRICS block is expanding expressly to counter dollar hegemony; and recent gold purchases by central banks have never been higher (Eastern central banks, of course, not Western ones).  

Perhaps the most damning evidence of dedollarization is the decrease of U.S. dollars held in foreign reserves.  In 2000, more than 71% of foreign exchange reserves were comprised of U.S. dollars.  Fast-forward to today and that number has dropped to just under 59% — a change that should give pause to even the most steadfast dollar bull.

As more countries circumvent the dollar reserve system, global demand for dollars will no longer be strong enough to absorb all the currency created by the U.S., which will lead to rising prices stateside.

There could even be a terminal scenario where the rest of the world concedes to a new reserve currency — maybe a gold-backed crypto or the BRICS’s version of Keynes’s Bancor, which was proposed as a kind of neutral international trading currency in the 1940s.  

If this were to happen, the U.S. economy would hit a brick wall.  

The dollar would have little demand outside the U.S., and not only would the inflation we used to export goods stay at home, but the dollars outside the U.S. would come flooding back, causing prices to go to the moon and imports to halt.  

And that is when we would truly pay for decades of living beyond our means–not through taxes, but through an unbelievable reduction in our standard of living.

So let’s retire the cliché notion that our tax dollars are funding government boondoggles, because, in reality, the cost is far greater.

 Brett Van Valkenburg lives in Manhattan and works as a financial proposal writer.  He authored Suzie Buttler’s First Day of School and Worse Than Dying.