Banking and Finance

Understanding the Real Effects of Stimulus Package on Economy

July 27, 2021

On March 25th, 2020, the US Senate passed the $2.2 trillion CARES Act, a stimulus package designed to speed up financial relief across the American economy. And, while the chance to save big and small businesses, the healthcare sector and even the chance to receive a $1,200 check all sound great, you have to stop and think: where is that money coming from, who will pay it back, and how does it affect the economy?

They’re all great questions. You can’t just pull $2.2 trillion out of thin air and give it out to people with no real consequences or owed debt. Once you receive your stimulus check, you won’t have to pay the money back. But, what about the government? Where is the money coming from and what kind of impact will it have on the economy after this is all over?

Where Does Stimulus Money Come From?

It’s important to understand that when a stimulus package is passed, it’s not as if the Federal Reserve is going out and printing trillions of dollars in green cash. Instead, what the United States is doing is creating digital dollars that are good as cash. And, they’re borrowing that from investors by selling US government bonds.

According to recent news, the Fed said it would buy $500 billion of Treasuries and $200 billion of mortgage-backed securities. This is unprecedented as the economy has never shut down like this before. 

While most people, 85% of Americans to be exact, stated last year that they think the United States should be working on lowering the country’s debt, even expert economists are speaking out in approval of this kind of stimulus package. It’s the only way, at the moment, to prevent a total economic collapse.

The National Review best explains this all by stating that, “Every dollar that Congress injects into the economy must first be taxed or borrowed out of the economy. So in a typical, full-employment economy, government spending merely redistributes purchasing power from one part of the economy to another.”

The Effects of Fiscal Stimulation

So aside from the fact that the Fed has to create digital dollars to fund a stimulus package and avoid an even deeper recession or depression like the one that’s sure to come, what other effects does this have on the economy?

For starters, the country’s debt will increase. Including the recent $2 trillion for the stimulus package, the United States debt will now reach about $25 trillion in total. Interest rates are currently low, meaning that if we have to add more debt to the national total, now isn’t a horrible time to do so. And, with national debt increasing, it raises the question of who’s going to pay it back and how?

Usually, a government is able to pay back debt by raising taxes or by cutting spending. With this current stimulus package being a whopping $2 trillion, it’s likely that it’ll mean that to pay it back over time, we’ll see an increase in taxes for the general public. Given the rate at which unemployment claims are surging, it’s unlikely that this will happen in the near future, but still likely.

What About Inflation?

It’s natural to think that an injection of cash into the economy will cause inflation. However, fortunately, a few economists think that it won’t currently be a problem for the United States.

William Gale, a senior economics fellow at Brookings Institute, told CBS that “there are powerful forces keeping inflation low.” Gale noted that advances in technology and mass globalization will continue to work in our favor in order to keep inflation low as we move through this pandemic and the recession it will cause.

Reports from the Financial Times stated that analysts used tools to look at a swap rate that measured projections for the average level of inflation in the United States over the next five years. The model found that it only rose to 1.49% which isn’t that much higher than where we currently stand at 1.09%.

Therefore, you shouldn’t worry too much about the side effects of a stimulus package on the economy in terms of inflation and focus more on the long-term effects we’ll all feel as we’re taxed down the road in order to pay off the money they’re giving individuals and businesses in order to stimulate the economy right now.

Saving for Future Taxes

Again, it’s not 100% certain that the government will raise taxes in order to pay back trillions of dollars of debt. However, it’s either that or they cut spending. And, with other eventual side effects of the economic crisis we’re about to enter, you’re going to want to ensure you’re saving for future taxes or for a recession.

At Cheese, we can help you do just that. We’re dedicated not only to providing you with high-quality financial resources and tips, but we want to help see you through this uncertain time and come out better financially. 

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