No Stupid Questions

For the benefit of non-Google users, here is the unshortened URL for that Bank of England article: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

With that said, while this comment does correctly describe what the USA federal government does with tax revenues, it is mixing up the separate roles of the government (via the US Treasury) and the Federal Reserve.

The Federal Reserve is the central bank in the USA, and is equivalent to the Bank of England (despite the name, the BoE serves the entire UK). The Federal Reserve is often shortened to "the Fed" by finance people, which only adds to the confusion between the Fed and the federal government. The central bank is responsible for keeping the currency healthy, such as preventing runaway inflation and preventing banking destabilization.

Whereas the US Treasury is the equivalent to the UK's HM Treasury, and is the government's agent that can go to the Federal Reserve to get cash. The Treasury does this by giving the Federal Reserve some bonds, and in turn receives cash that can be spent for employee salaries, capital expenditures, or whatever else Congress has authorized. We have not created any new money yet; this is an equal exchange of bonds for dollars, no different than what you or I can do by going to treasurydirect.gov and buying USA bonds: we give them money, they give us a bond. Such government bonds are an obligation that the government must pay in the future.

The Federal Reserve is the entity that can creates dollars out of thin air, bevause they control the interest rate of the dollar. But outside of major financial crisis, they only permit the dollar to inflate around 2% per year. That's 2% new money being created from nothing, and that money can be swapped with the Treasury, thus the Federal Reserve ends up holding a large quantity of federal government bonds.

Drawing the distinction between the Federal Reserve and the government is important, because their goals can sometimes be at odds: in the late 1970s, the Iranian oil crisis caused horrific inflation, approaching 20%. Such unsustainable inflation threatened to spiral out of control, but also disincentivized investment and business opportunities: why start a new risky venture when a savings account would pay 15% interest? Knowing that this would be the fate of the economy if left unchecked, the Federal Reserve began to sell off huge quantities of its government bonds, thus pulling cash out of the economy. This curbed inflatable, but also created a recession in 1982, because any new venture needs cash but the Feds sucked it all up. Meanwhile, the Reagan administration would not have been pleased about this, because no government likes a recession. In the end, the recession subsided, as did inflation and unemployment levels, thus the economy escaped a doom spiral with only minor bruising.

To be abundantly clear, the Federal Reserve did indeed cause a recession. But the worse alternative was a recession that also came with a collapsed US dollar, unemployment that would run so deep that whole industries lose the workers needed to restart post-recession, and the wholesale emptying of the Federal Reserve and Treasury's coffers. In that alternate scenario, we would have fired all our guns and have lost anyway.