What the stimulus can actually do to the economy

by coffee-trader

The stimulus is roughly the size of 5 weeks of GDP. The efficacy, however, is limited. A few reasons:

  1. It doesn’t restore investment and consumer confidence to pre virus levels. Most of it will be used to barely get by or as s precautionary savings
  2. It is not as timely an efficiently assigned as actual market activity (the real economy generating profits, rent and wages by the day)
  3. The loans also aren’t necessarily efficiently assigned or spent. They’re handing money based on need but how it’s used and received won’t be as economically efficient as regular bugdet decision making. This risk the creation of financial bubbles and acquisition of junk credit
  4. Crowding out: the stimulus will be financed with bonds. Those bonds need to be purchased at the expense of ingesting (probably not such a big deal in these times with low investment confidence though)
  5. You can’t legislative or QE the creation of actual wealth. Only real and demanded output is wealth. You can alleviate the need for liquidity thanks to our fiat money system, but it isn’t actual wealth. In the best case, it’s future wealth borrowed from the future, and in the worst, it’s just inflation (financial bubble)
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The conclusion: it cushions the fall and probably avoids the long term destruction of value (some jobs and businesses), but ultimately you can’t get something for nothing (back to point 5), otherwise the FED would always keep unlimited QE and government would pay for everything. In terms of markets, I expect more bull traps on the way to the bottom before the recovery, and perhaps a less horrible bottom.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.

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