The $1.9 trillion stimulus bill passed Congress and is now law.
President Biden has promised even more stimulus. And while $1400 stimulus payments may sound good, a March 13, 2021 article in The Economist: “Biden’s Big Gamble,” raises the right question: will adding more debt provide the desired stimulus to the American economy or will it backfire with high interest rates and stress on government debt?
Since the start of the pandemic just over a year ago, America has paid out nearly $6 trillion. The Federal Reserve will pour another $2.5 trillion into the banking system this year. That’s a lot of new debt.
On the other hand, the stimulus positively impacted retail sales by 7.4% in January (compared with year-ago levels), and with fewer bars and restaurants open Americans actually began to save more—nearly $1.6 trillion. Unemployment may drop below 5% by the end of the year.
What’s the danger? In this low interest rate environment, high savings and the willingness of the Fed to stoke the fires, the economy overheats. An overheated economy leads to higher inflation, higher interest rates and is not sustainable. Ultimately, recession awaits. As a result, “[t]he Fed may have to pour cold water on the economy, raising interest rates to get inflation down.” Higher rates could cause problems for the markets and create a dilemma for an already heavily indebted government.
Put simply, such a massive stimulus is placing a big bet. At some points, all bets have to be called.
We can only hope it’s a good bet—particularly in light of Biden’s attempts to raise taxes across the board. Raising taxes is often the biggest inhibitor to growth. Consider it: low interest rates, low inflation, high savings, increased debt, higher taxes—it’s a lot of ingredients to be stirring into the soup of the American economy.
Photo by Alexander Mils on Unsplash
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Published March 26, 2021
Topics: Culture Commentary