bluntlysaid

Does a second stimulus package of $50 billion make sense for the US economy? No.

A stimulus is one way that the government injects its money into the economy. Congress would approve this measure in the hopes that $50 billion additional dollars in consumers’ hands will increase consumption, throw cash at struggling manufacturers, and improve the overall economy. I have no doubt that the stimulus package would have some positive effects on the economy, but the overall effect would be negative. Let me explain:

1. Increased government spending will increase inflation. By releasing cash into the system, the Treasury will essentially devalue the dollar. This will make imports (virtually everything Americans buy) seem more expensive. In other words, consumers will need more dollars to purchase the same goods they were buying one year before. This is inflation.
2. Oil is denominated in dollars. Devaluing the dollar will make oil seem expensive, creating inflationary pressure on all oil related products, services, and actions. Driving to work will cost more, shipping goods will cost more, and making products will cost more. All of this drives prices up, further increasing inflation.
3. The stimulus wouldn’t solve the underlying problems in the market—the market is undergoing a self-correction on the mortgage front and a self-correction on the oil front. The recent bank failures (IndyMac) makes me think that the mortgage part of the crisis is in the process of bottoming out, or is at least close to bottoming out. Once you hit the bottom, there’s no where to go but up. We will hit the bottom with or without an additional $600 dollars in stimulus money since bank failures are tied to already purchased assets (stinky loans) and not current economic performance.
4. The oil correction is a little more complicated. Oil prices are sky rocketing because China, India and Russia have booming economies. Growing economies demand oil, and increased demand causes the price of oil to rise. Oil is used to produce just about everything, so the price of just about everything rises. The world is paying for the good-fortune of these emerging economies. Prices are unarguably at unsustainable levels, so the market will have to correct itself. Either demand will fall (i.e. manufacturers will have to make less goods because the cost of oil for those additional products raises the price so much that consumers are unwilling to purchase the goods) or the market will create more efficient technology/processes to compensate for the higher cost of goods. Again, an extra $600 of stimulus money will not solve the problem in the long run. It will only cause manufacturers to momentarily increase production since consumers have a one-time shot of purchasing those marginally more expensive products that we just talked about.  Once the money is spent, manufacturers will have to stop making “additional units given how expensive the raw materials are getting, lowering demand and helping the market find equilibrium again.

A second stimulus package will not solve our current economic woes. Ms. Pelosi, don’t push for it.