President Joe Biden is trying to push through a $1.9 trillion stimulus program that many congressional Republicans don’t want and the economy may not need.
As it stands, the package includes direct checks to millions of Americans, enhanced unemployment benefits, a more than doubling of the minimum wage, aid to state and local governments and money for Covid vaccines and testing, among other things.
Republicans object to the plan for its hefty price tag and, in particular, the $350 billion earmarked for what is perceived as a bailout for poorly run localities.
But the issues run even deeper than that.
Yet it is just those people in the neediest classes who may end up suffering long-term from pumping too much, according to Jim Paulsen, the Leuthold Group chief investment strategist.
Paulsen is known for his mostly positive views on the economy and financial markets. But he worries that the continuous desire to keep feeding the economy will have a longer-term negative burden that again will fall on those least able to bear it.
The fear is that U.S. overdoes it with stimulus, resulting in a need to pull back the reins quickly if inflation runs out of control. Of course, those have been concerns ever since the massive policy response to the financial crisis in 2008, and inflation has stayed quiescent.
But with “the overuse and abuse of economic policy” present now might finally change that dynamic and cause severe problems down the road, Paulsen said.
“There’s a number of bad things that could result from that, not today but down the road. Certainly, if it brings overheating and inflation, that may necessitate an incredibly speedy and aggressive tightening,” he said.
The result could be “a loss of confidence in government finances in this country” as the national debt swells nearly $28 trillion, the public portion of which now exceeds total GDP, Paulsen added. That in turn could provoke a snapback in the market that brings about economic havoc.
“Any or all of those could result in a very severe recession again quite quickly, not this year but in 2022 or 2023, and if it does it’s going to end up hurting the same groups that everyone is trying to help today the most,” he said. “They all need to have a view of what that means down the road. I just don’t think anyone has that view and I think that’s irresponsible.”
till, the economy can’t come full circle until the most vulnerable are taken care of.
Spending needs to be targeted at those most impacted. In December, nearly half a million hospitality workers lost their jobs, and nearly 16 million continue to collect some form of unemployment benefits, though the number that continues to fall. They will continue to need plenty of help.
However, the rest of the economy is in nowhere near those dire straits.
In aggregate, U.S. households have seen their finances greatly strengthened by two rounds of fiscal stimulus worth more than $3 trillion. That has come with unprecedented levels of monetary goosing from the Federal Reserve in the form of rock-bottom interest rates, trillions of dollars in bond buying and an extraordinary array of – now discontinued – lending programs aimed at getting the economy back to pre-Covid levels. The Fed is currently buying bonds at a pace of close to $1.5 trillion a year.
In aggregate and following the slathering of stimulus that already has been thrown at the economy, the economic health of Americans is strong.
A few numbers to demonstrate:
- Bank deposits are up to nearly $16.2 trillion, a 21.3% increase from a year ago, with many Wall Street institutions seeing record highs.
- Of those deposits, there is currently $1.4 trillion in what BofA termed “excess savings” that likely will climb to $1.6 trillion in January as checks continue to be distributed from the $900 billion stimulus that Congress passed.
- Spending is surging, with debit and credit card expenditures up 22% year over year in the seven-day period ending Jan. 16 for lower-income individuals who received stimulus payments in the last round, according to Bank of America Global Research.
“U.S. households have never had as much cash as they have now. They’re really extraordinarily cash-rich,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said a few days ago during a webinar. “This effectively is a war chest that they have available to spend once they can spend and assuming they want to spend once the Covid fear has gone.”
Shepherdson said he thinks inflation could accelerate before the year is out and cause the Fed to rethink its ultra-accommodative policies and have to start tightening sooner than the market expects.
Of course, the virus is the key to everything.
Biden made much over his push for 100 million vaccines in 100 days — but that’s just slightly ahead of the current pace. The point at which the U.S. reaches herd immunity likely will coincide with a full recovery, but in the meantime there will be trillions coursing through the system to get the nation through, even if it isn’t needed.
In a note to clients last week, Paulsen said what the economy needs most now is not more stimulus but rather a “shot in the arm,” in the most literal sense. Getting people vaccinated, he insists, is far more important than continuing to force more money into an already saturated economy.
“This may end up hurting the exact people we’re trying to help more than anyone else,” Paulsen said. “This started in 2009 [during the financial crisis] when we adopted a new playbook like Cash for Clunkers and TARP and all these other things. I don’t think we ever put this stuff back in the bottle, and it just keeps getting worse.”
Reference: CNBC
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