The drumbeat has started. The feds need to spend more to avoid a depression! That's the latest view being pushed by the likes of Vox and other far left "news" outlets. Nancy Pelosi is joining in. She wants to enact a program that will send $2000 per month to every American making less than $130,000. Pelosi didn't give details, but let's look at her suggestion for a moment. There are 330 million Americans. Some are children, so let's assume that they won't get the payment until they hit 18. That would cut the number to roughly 210 million people. Pelosi doesn't say explicitly if she's talking about household income or individual income, but logically it should be individual income. After all, it wouldn't make sense for a single making $128,000 per year to get the cash while a married couple who each make 66,000 dollars would not. There are not exact figures about how many individuals make over 130,000 per year, but a fair estimate based upon IRS information is that no more than 15% do so (and the figure could be substantially lower.) That reduces the 210 million people to 178 million recipients.
The cost of sending 178 million people 24,000 dollars per year is four and a quarter trillion dollars per year. Pelosi wants to spend more on this program than the entire federal government ever spent in one year before 2020. That money is also more than 20% of US GDP prior to the virus. Where would it come from? It can't be borrowed. The world financial system is already being tapped by huge expenditures for existing government needs. Believe it or not, the supply of capital around the world is not limitless, even if people like Pelosi cannot grasp this fact. If the government(s) soak up massive cash reserves with this kind of borrowing, there just won't be cash available for private enterprises who need debt. If the point is to avoid a depression, then depriving private businesses of capital is a sure formula for causing not preventing a depression.
No problem is the response from the far left. The government can just print the money rather than borrowing it. It's easy; the federal reserve will just "create" the 4 plus trillion dollars each year. But this is another prescription for disaster. Under classic economic theory, this is the recipe for inflation. Inflation was often defined as "too much money chasing too few goods." When the total amount of money in circulation (called the money supply) gets too large, prices start to rise. This classic theory doesn't always work though. After the 2009 stimulus and other bailout payments, the money supply soared, growing by nearly 200%. Prices, however, did not rise rapidly. There were many explanations for this outcome. First, the decline in overall demand was so great that the push towards inflation was overcome. Second, others opined that the velocity of money stayed low so the inflation push didn't come. In other words, even though the cash was out there, people were putting it in the bank and not spending it, so there was no artificial increase in demand to cause price rises. Third, still others said that the who theory was wrong. Of course, as time went on after the big increase in money supply, some prices did rise rapidly. The prices of commodities like gold shot through the roof; there was more cash available to be parked in gold. Prices of stocks also went up dramatically. The big extra glut of cash was invested or saved, so there was inflation in the value of investments (stock) and savings (gold).
But what happens if the now vastly larger money supply is doubled again and the new cash goes to people who are most likely to spend it? Logically, that will mean a big increase of demand for goods at a time when production of goods is limited due to virus induced disruptions. It's a sure recipe for inflation. And to be clear, the inflation we are discussing is not 2 or 3%. No, the inflation of this sort is hyper-inflation. Price could go up quickly. In the past, countries suffering from hyper inflation have seen price rises of 40% each DAY. See, the problem is that once the hyper inflation starts, no one wants to hold cash because its value drops each day. They want to hold other assets. Eventually commerce crashes and the depression we are supposedly trying to avoid looks mild by comparison to what we get.
The point is that the rules of basic economics cannot be avoided. Adopting the wishful thinking approach of a Bernie Sanders or an AOC just doesn't work no matter how great it sounds to the uninformed.
It may sound odd that granting people these payments is a sure path to a terrible depression, but it is. We ignore reality at our peril.
The cost of sending 178 million people 24,000 dollars per year is four and a quarter trillion dollars per year. Pelosi wants to spend more on this program than the entire federal government ever spent in one year before 2020. That money is also more than 20% of US GDP prior to the virus. Where would it come from? It can't be borrowed. The world financial system is already being tapped by huge expenditures for existing government needs. Believe it or not, the supply of capital around the world is not limitless, even if people like Pelosi cannot grasp this fact. If the government(s) soak up massive cash reserves with this kind of borrowing, there just won't be cash available for private enterprises who need debt. If the point is to avoid a depression, then depriving private businesses of capital is a sure formula for causing not preventing a depression.
No problem is the response from the far left. The government can just print the money rather than borrowing it. It's easy; the federal reserve will just "create" the 4 plus trillion dollars each year. But this is another prescription for disaster. Under classic economic theory, this is the recipe for inflation. Inflation was often defined as "too much money chasing too few goods." When the total amount of money in circulation (called the money supply) gets too large, prices start to rise. This classic theory doesn't always work though. After the 2009 stimulus and other bailout payments, the money supply soared, growing by nearly 200%. Prices, however, did not rise rapidly. There were many explanations for this outcome. First, the decline in overall demand was so great that the push towards inflation was overcome. Second, others opined that the velocity of money stayed low so the inflation push didn't come. In other words, even though the cash was out there, people were putting it in the bank and not spending it, so there was no artificial increase in demand to cause price rises. Third, still others said that the who theory was wrong. Of course, as time went on after the big increase in money supply, some prices did rise rapidly. The prices of commodities like gold shot through the roof; there was more cash available to be parked in gold. Prices of stocks also went up dramatically. The big extra glut of cash was invested or saved, so there was inflation in the value of investments (stock) and savings (gold).
But what happens if the now vastly larger money supply is doubled again and the new cash goes to people who are most likely to spend it? Logically, that will mean a big increase of demand for goods at a time when production of goods is limited due to virus induced disruptions. It's a sure recipe for inflation. And to be clear, the inflation we are discussing is not 2 or 3%. No, the inflation of this sort is hyper-inflation. Price could go up quickly. In the past, countries suffering from hyper inflation have seen price rises of 40% each DAY. See, the problem is that once the hyper inflation starts, no one wants to hold cash because its value drops each day. They want to hold other assets. Eventually commerce crashes and the depression we are supposedly trying to avoid looks mild by comparison to what we get.
The point is that the rules of basic economics cannot be avoided. Adopting the wishful thinking approach of a Bernie Sanders or an AOC just doesn't work no matter how great it sounds to the uninformed.
It may sound odd that granting people these payments is a sure path to a terrible depression, but it is. We ignore reality at our peril.
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