It's been a while since I wrote anything except in my favorite on-line forums, but I recently wrote this article about the Stimulus package Americans are supposed to be getting. At this point, I'm not sure it's going to be officially published anywhere, so I figured I'd post it here.
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Free Money!
Oh, boy! In May, thanks to the stimulus package, the federal government will be sending out checks to most Americans in the $300 - $600 range, to be spent on whatever you want. Woo-hoo, free money!
Or is it free? Just where is all this money going to come from? Well, government gets its money from three sources: taxes, borrowing, and printing.
If they're going to pay for it with taxes, and they're not taxing us now (that would defeat the point of the "stimulus" package), then they must be planning to take it out of future taxes. But if they don't cut government spending somewhere, the only way taxes can pay for it is by raising taxes.
If they're going to borrow more money (through Treasury Bills, bonds, etc), they won't have to raise taxes. But the federal government is already borrowed to the hilt. The national debt continues to increase every year, especially for our out-of-control military spending, and the debt is so massive that other countries are losing faith in the U.S. dollar, which is why the dollar is being devalued compared to other currencies. How much more can they borrow if fewer people believe that the goverment (and taxpayers) will pay it back? Governments can't really go bankrupt, but they can sure do a lot of harm to the economy while trying to.
Lastly, they can print more money. Or they could, except that under the current system, the Federal Reserve and not the government decides how much money should be added to the economy. The law could be changed, but that would be considered a rather drastic change to our financial system. Since its creation in 1913, the Fed has had a nasty habit of increasing our money supply every year, and thus devaluing our earnings and savings, while trying to offer artificial and unsustainable "boosts" to the economy.
In fact, what the Fed does is much like what the current administration is hoping to do with the stimulus package. Like eating a candy bar, the "sugar rush" of the extra money will help temporarily, but without the means to sustain it, there will necessarily be a corresponding fall or crash.
Sustainable economic growth requires balancing supply and demand. Production must be geared towards satisfying consumers' most urgent wants first, and to their less urgent wants secondarily. Consumers tell producers what to produce not only by what they're willing to buy, but by what they're not willing to buy, and by how much money they're willing to save and invest instead of spending right away. Prices are the means of conveying this information to producers, including the "prices" of interest rates.
Interventions in the economy in the form of easy credit, increased money supplies, or stimulus packages are unsustainable because they upset the balance between supply and demand, not improve it. Once the balance is upset, the economy necessarily has to reconfigure itself and find a new equilibrium, a new point of balance. The result of intervention is a zero sum game, with both net winners and net losers to make up the balance.
The best thing Americans can do with their stimulus check is not to spend it, but to use it towards their debt. Or, if you're one of the few Americans not in debt, invest the money. If we do that, the "boost" to the economy may not be as great, but the inevitable crash that follows won't be as great, either.
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