In-depth Analysis

The $1.9 Trillion American Bazooka

Mid-March, in the Oval Office of the White house, Joe Biden signed into law a $1.9 trillion stimulus package for the American economy. The final approval occurred a day earlier than had previously been announced, signalling the President’s desire to enact, without further delay, one of the top legislative objectives of his tenure.

The American Rescue Plan, as the Act is known, includes direct payments of $1,400 to Americans earning $75,000 or less a year, as well as a $300 a week top-up of unemployment benefits. There is an obvious social intervention side to the package, which was justified by the President ,and law makers who voted for it, by the need to support the lower and middle income citizens, but above all the plan is designed to kick-start the post-pandemic economy with a bang.

The package’s approval process, which also required rubberstamping by both the congress and the senate, run, as expected, strictly along party lines, with every single Republican lawmaker voting against it. However, fears related to potential negative collateral effects extend beyond the partisanship of American politics. Economists are also divided, with some defending the policy as the only way to escape the stagnation of the economy, while others warn about the danger of unleashing too much consumer firepower, and the detrimental effect a sudden boom in economic activity may have in price stability. This effect is already noticeable in the bond market, with many investors starting to price-in the risk of high inflation by selling low-coupon tittles, resulting in rising yields, supporting dollar gains.

This stimulus package has been described as a gamble of high stakes, as illustrated by the front cover of The Economist’s latest edition. The reasoning is the following: It is estimated that due to the lockdowns, consumers, unable to go out and spend as usual in restaurants, cinema, bars, etc, have accumulated around $1.6 trillion in excess savings over the last 12 months, which should be added to the $1.9 trillion value of the stimulus, in order to get an idea of the spending power at the disposal of Americans in the post-pandemic period.

If vaccination goes according to plans, as we all hope it does, an almost COVID free reopened economy will be engulfed by the sudden consumption demands of crowds of shoppers with plenty of spare cash to throw around. This could trigger a spike in inflation, a dark force that hasn’t made its presence felt in the developed economies of the West since the 1970’s.

It is this fear of consumer prices getting out of control that is scaring politicians and economists into advising against the size of the program. If this ‘gamble’ pays-off, America will achieve the incredible feat of escaping a long-lasting recession in the wake of the biggest peace-time economic contraction. However, there is also a real risk of the country ending up with high inflation, unprecedented levels of public debt and a central bank with no choice but to tighten monetary policy and stifle future growth.

Will Joe Biden’s signature wager place him alongside F.D. Roosevelt and Abraham Lincoln, as one of America’s great presidents, or if he will be remembered as the one who gambled all his chips in one risky bet and lost? We will have to wait and see.

By Ricardo Evangelista

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