When Stimulus is No longer Stimulus...

The unprecedented economic changes continue and the reactions to them from the governments as well. In a very short period of time, we have seen signs of significant declines in economic activity which have impact almost every sector of the economy some way or another. While past declines were also difficult to predict and measure, this one is too difficult to know how short or long it will be. Most consider that a recovery is inevitable although signs continue to point to radical changes in the behaviors of consumers and businesses that will have longer impacts to economies around the world.

Given the fact that consumers make up 70% of the "old economy" in the United States, the government has focused on supporting them in an effort to make the recovery shorter and sharper. Given the reliance of consumers on their employment to continue their spending, the many Stimulus packages have focus on providing consumers liquidity to offset their losses from the economic shutdown. However, when you measure the amount of money actually going into the pockets of the end consumer, there are clear indications that it is less than 70% of the pie.

So far, there have been over $2 trillion deployed into the economy without including the several trillions of dollars also made to provide market price stability with the Federal Reserve acting as the backstop to many fixed income (debt) programs that keep the financial market liquid and solvent. This has expanded the balance sheet of the Fed by multiples of even their highest levels after the financial crisis of 2008 as it became the main tool to combat the economic recession at hand. They have clearly shown their hand of doing all it could do to stabilize markets.

However, this combination of fiscal and monetary stimulus at levels never before seen have been on top of what I believe to be a very unstable foundation. This stimulus is being funded by fiat printing and debt issuances beyond levels even thought of in the past. While the outstanding debt as a proportion of GDP is still within what many believe to be manageable, it assumes that GDP can be sustainable for extended periods. This is where I believe the assumptions is based on a "house of cards." Expanding the debt is the same as postponing the inevitable which could be harsh bouts of inflation and stagnation in the future.

The unfortunate part is that the steps being taken are also punishing those that have been more prudent by savings. Savings rates which many prospective retirees will want to depend on to live their life's on will be substantially impaired in the future. Given how linked the financial markets are, it is also bringing to risk that all gets liquidated and deflates as well. The time value of money will no longer matter as the view of assets may take a turn for the worst when they are impacted by the risks of these changes. I hate to be so pessimistic, but I cannot fathom how we grow our way out of this in the next ten years.