Stimulus & Economics: Some basics & things to ponder

Yes, we are doing a finance piece today. As with every finance piece I try and do a disclaimer. This blog and this post are my opinions based on years of working in the finance industry. These are not meant to be financial advice but rather a perspective on what is happening in the finance world. Before making any financial decision consult several sources to make an informed decision.

We know that there is another round of stimulus on the way if you live in the U.S. “Trillions” a number that is thrown around a lot. Going to let you in on a little secret, there isn’t a warehouse full of trillions of dollars waiting to back up the stimulus. For lack of a better term, all of these transactions are “numbers on a screen”. As an example, you may have 10K in your checking account. The bank does not have 10K cash sitting in their vault with your name on it.

Cold Brew Ice Coffee, A great stimulus!

What does stimulus do? It provides money so people can spend it and stimulate the economy. You buy a happy meal at McDonald’s. Someone has to get it ready for you, someone has to make the ingredients, someone has to make the container for the fries… you get the point. That is stimulus at its heart. It’s not just giving you money, it’s the residual effect of what happens when you spend that money and how many people are affected by it.

The down side? The value of money decreases. Its simple supply and demand right? The government through stimulus is increasing supply. At some point there will be so much money floating around that it takes more to buy a product. If everyone has more money, why would someone who produces a product not raise the price? Not only that but the cost to obtain money, interest rates, have been very low for years (decades). So what does this mean? It means that the more money that goes into the economy (even electronically) the less valuable it is.

Why are antiques worth so much? Because there are fewer and fewer of them every year. Did you try and get a new gaming console this year? Hard to find right? And the price if you did find one, oof. Want a ticket to a football game? Not cheap right. You get the point, the less of something there is the more valuable it becomes due to demand.

What does this mean for us? First the short term effect is positive people get cash and can spend it now and then give that money to someone else. That is the best outcome of stimulus and it absolutely works. Sustained stimulus (2,3,4 checks) this is problematic because its necessary due to an artificial condition. Demand is there, but supply of goods and services are reduced due to the pandemic. So more money pours into the economy to keep people afloat.

What happens when things get back to the new normal and people are vaccinated? The money doesn’t go away it’s still out there, so you get inflation. For many of you under 30 you’ve never really experienced severe inflation. Prices go up, income stays the same. It’s very simple, the more of something that exists (material items) the less valuable it becomes, that includes money.

Always be mindful of your personal economy. 30 mins a week minimum you should invest in your budget, savings, investments, spending habits. Become an expert in your personal economy, make sure you are financially educated in how you handle money. The world will carry on, the economy will wax and wane. Things have been good for a while now, even with a pandemic and decades of government spending inflation remains at bay for now.

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