Since the pandemic began, the federal government has passed three stimulus packages totaling $5.15 trillion (which was entirely borrowed): including; $2.35 trillion in March/April 2020; $900 billion in December 2020; and $1.9 trillion in March 2021 (the American Rescue Plan Act of 2021 -- ARPA). This total by the way does not include efforts of the U.S. Federal Reserve that could exceed $4 trillion.

The budget for the U.S. in 2019 was $4.45 trillion. But 20% or $0.9 trillion was borrowed. Since 1968, our federal leaders have produced a balanced budget only four times in 52 years while the federal debt has grown from $271 billion in 1957 and has never been reduced. Consider the last budget stalemate in 2018-2019. The two sides couldn’t come to a consensus so they eventually “compromised” resulting in an 8% increase in spending with built-in borrowing. States (except for Vermont) are not allowed to budget this way. They are required to adopt balanced budgets with no borrowing. If an unanticipated deficit develops, then borrowing becomes an option. Somehow both Red and Blue States manage it every year.

The debt that we all owe as citizens was $16.8 trillion in pre-pandemic 2020 which represented 81% of U.S. GDP. Adding $5.6 trillion makes it $23.0 trillion and a whopping 107% of GDP. Since GDP includes what the government spends, this increase in spending has resulted in an all-time high of 44% of GDP that is based on “priorities” of D.C. politicians. But high debt levels slow economic growth. Each percentage point of debt above 77% costs 0.017% in annual growth - equating to about a 1/2 of a point of growth. This may not seem like a lot growth has only ranged between 1.6% and 2.9% over the last ten years.

It would take the average American more than 2.5 years using up all their annual income to pay off their debt portion. Each American “owns” more than $82,000 of the debt but per capita income is only $32,000. This is the largest external public debt in the world. High debt levels are sometimes described as “driving with the emergency brake on.” In 2019, interest on the debt totaled $376 billion or 8.4% of the budget which crowds out other spending.

Perhaps the most troubling part about the most recent stimulus packages is that they were arguably not needed and may actually hurt the economy. In early 2020, a stimulus in the face of Coronavirus uncertainty seemed reasonable. But with multiple vaccines being distributed, overall positivity increasing and new market highs, the Fed in December 2020 predicted an economic growth rate for 2021 of 4.2% up from 4.0% in September. The forecast even before the vaccine came out was higher than the last ten years! The Fed also predicted an unemployment rate of 5.0% for 2021 (“full employment” is considered 4.1% to 4.7%) which is lower than most of the past 40 years (the average unemployment rate since 1983 is over 6% and has only dipped below 4% in 25 months -- 20 of which occurred during the Trump years). We have strong growth and above average employment -- but still we need huge stimulus packages?

When growth is robust and the government pours massive amounts of money into the economy, especially at a time of stock market highs and with pent-up demand due to the fading pandemic, high demand will drive prices upward. But inflation erodes the value of money. For those people that are nearing/are already in retirement that have their money in low-risk/low-interest investments, the value of their money goes down. Older people are especially likely to use certificates of deposits (CDs) as investments. They remember the 18% interest rates of the early 1980s. Back then CDs were a simplistic hedge against inflation, but since interest rates have been kept artificially near zero since 2008, CDs only earn about 1/2%. When inflation rises above investment interest the investment loses value. This can have a serious impact on retirees and the economy since retirees will have less money to spend. And they do spend. People 50 years and older make up about 39% of the economy.

The fear of inflation is growing. It is now the #1 risk among portfolio managers polled by Bank of America. The fear is that the already surging economy will heat up too fast, spurring inflation. A major cause for this is the unprecedented amount of money that is being poured into the economy. It is well known that a major tool the Fed uses to spur the economy is to lower interest rates; and to slow the economy the Fed can increase interest rates. These efforts affect the amount of money available in the broader economy -- but the federal government is releasing a massive influx of $2.8 trillion into the economy when it is already doing well. This will likely heat things to a point where the Fed will have to raise interest rates that they otherwise would not have had to.

And the spending is mostly profligate and barely thought through. For example, Sec. 1003 of the ARPA appropriates $47.5 million “for necessary administrative expenses associated with carrying out” pandemic administration without any guidance as to how it should be spent. That’s the norm. The bill also contains $350 million for state and local governments. When asked by reporters if states could use the funds to offset tax revenue declines, “a senior Biden administration official did not clarify. The aid is intended to be flexible” the official said. In some states/municipalities, the feared 2020 crisis did not materialize with overall state revenues declining by less than 2% resulting in a windfall of 20% above normal revenues. 

There are too many non-pandemic related items in the act to cover here, but the area that has gotten the most coverage has been the direct payment component of the package, in which individuals with incomes under $75,000 will receive $1,400 with a phaseout above that which costs $410 billion. Even if you are fine with someone making $75,000, not having any income loss and getting a check for $1,400 no questions asked, what about the other $1.5 trillion? Unlike the hastily written, empty impeachment articles of a mere 566 words, the ARPA is a solid 242 pages of a dizzying array of programs, projects and beneficiaries, and reads like a package of Democratic priorities/giveaways masquerading as pandemic relief, line after line of doling out money.

People who worked through 2020 with no reduction in pay talk amongst themselves about how they are going to spend their “stimmy” checks. A poll conducted by a securities firm found that 40% of the respondents plan to invest at least some part of their checks in stocks/bitcoin. Other interviewees will fund a Robinhood account, donate $800 to a Buddhist Center, help fund a side business, and fund college savings accounts.

The sad reality is that they, or someone else, will have to pay the bill in the future. The impact of this unrestrained borrowing and spending will eventually be realized in negative consequences for America, but as we have seen all too often, it will take a crisis to stop it.

Image: Pixabay