Is the Stimulus Package a Good Idea?
It looks like the Congress is going to pass a stimulus package (details to be determined) that gives American consumers about $150 billion dollars to do what they do best – consume. Why do we need this and how did the economy come to be is dire straits to begin with?
It seems to me that our problems are due to debts and deficits. The US savings rate has dropped below zero. As a nation, we spend every cent we earn plus a few more we borrow. Many have financed this prolonged binge by borrowing against the inflated values of their homes. The rest seem to have simply racked up enormous amounts of credit card debt at astronomical interest rates.
The US has also been running serious trade deficits for the past several decades. We seem to have lost our competitiveness in the world markets for most products other than entertainment and subsidized agricultural commodities. I may speculate on how this happened in a future article.
Last but not least, the federal government has been running huge deficits even by their own questionable accounting methods for the past 7 years. Shortfalls must be covered somehow and the two methods available are borrowing and printing more money. The government cannot borrow from Americans, we already spent everything we got plus some. So they borrow from other countries. China invests about one billion dollars in US securities every day. They hold around 1.5 trillion dollars worth today. Saudi Arabia is another big financier of US debt. Any remaining shortfall is made up by printing money.
Irrational exuberance at the printing press is known to cause inflation. Inflation, in turn, is a tax on savings. Many Americans seem to be safe here. However, those who behaved responsibly by saving for their retirement (as opposed to hoping the government would bail them out) are penalized while those who racked up big debts are rewarded as the value of the dollars they owe decline.
So now the economy is slowing as people reach their credit limits and the housing bubble deflates. One might expect to hear some debate over what went wrong, how to fix it, and what to do to keep it from happening again. But, this is an election year. If there is one thing both the “tax and spend” Democrats and the “borrow and spend” Republicans can agree on, it is to never oppose giving away money in an election year.
The plan going forward is to borrow our way out of debt. We will we will borrow $150 billion from China or somewhere else and give to Americans (though not the really poor) so they can go to Wal-Mart and buy more imported goods. That way, all our congress critters still have a good chance of getting re-elected even though the economy is in shambles.
Sounds like a good idea, doesn’t it?