The Great American Stimulus: Trillion Dollar Band-Aid
A game of tug-of-war between Democrats and Republicans that has been going on for months now. Unemployment remains at mortifying levels, small businesses are at the edge of bankruptcy and big corporations want more handouts. Is the long term effect of more debt worth the short term relief?
By Daniel Betancourt/ OptionsSwing Inc. October 10th,2020
The unprecedented levels of unemployment that we were hit with back in March led to an immediate fiscal response of supplementing an extra $600 to current Unemployment Insurance benefits as part of the Cares Act; some argued that this amount was ridiculous because it provided no incentive/encouragement for beneficiaries to return to work. Since then, the amount has been reduced and continues to be tossed around in the coming stimulus. A simple argument can be made that the fiscal response was thrown out losely and no due-diligence was done when it came to supporting local government. The old saying “Some need it more than others” applies perfectly, but of course the shock of the shutdown sent policy writers to the printing press.
The Paycheck Protection Program will go down in history as one of the biggest scams in the U.S., why do we say this? Anyone who was represented under a LLC, S-Corp or C-Corp could have applied and received PPP no matter if they were affected or not. Some industries came out of this pandemic thriving while others on the edge of bankruptcy. Some publicly traded companies received millions of dollars in relief and were publicly shamed on social media which forced them to give it back. Restaurants who received PPP, which is meant to be used on employee wages, have burned through their PPP on rent and utilities which forces them to pay the entire amount back. How do I know this? Well because I own a bar and restaurant in LA County. The process of applying and receiving PPP relief was streamlined so well that applicants, like myself, received funds less than a week after applying. The only information they asked for was payroll reports; they based the amount of money you would receive on your monthly payroll. They did not ask for sales reports pre and post the shutdown; they took the applicants word for it when they checked the “YES” box when asked if they were affected by the shutdown. Applicants are not to blame, who would not say yes to free money. On the other hand, we have businesses who are thriving from the closures and were able to use their PPP to pay employee wages meaning they will have 75% of the loan forgiven.
As for the stimulus check that each individual received, if qualified, where did we spend it? Was it a coincidence that Apple released their “affordable” iPhone SE the same day that the stimulus checks were allocated? Just take a look at the stock market and when it started to rally after the crash. Those stimulus checks were released in April. Here is a better picture of Apple’s chart.
The arrow points at the day the checks were dispersed and Apple released their new phone. The highlighted green rectangle represents the day they reported earnings; guess what their best seller was, you got it, the iPhone SE. What these checks did was boast the stock market; our $1200 went straight to Amazon, Apple, Shopify, LuluLemon and etc. A common misconception is that the stock market represents the economy; how can the stock market represent the economy when the market is at levels much higher than it was before the pandemic? The dirty truth is that most U.S. citizens failed to stimulate their local economy with their checks. They spent it on companies that get away with not paying a dime in taxes and whose products are mostly produced in other countries.
Short term effect of stimulus is that it gets the job done; maybe more than what was intended but it gets it done. The Cares Act most certainly helped stimulate local economies by causing a ripple effect. Consistently giving the unemployed extra funds led to deeper local spending at small businesses because they did not have to plan on what to spend their one large (stimulus) check on. We believe that when implementing stimulus, it should only be done when there is a decline over a certain period, it should be given to the most vulnerable, and it should be short lived. Policy makers should be informed about regional differences in fiscal stimulus so that they can better allocate resources to training providers and economic development agencies.
Long term effect of stimulus is that individuals begin to feel spoiled and become irresponsible; the economy slips and policy makers put a trillion dollar bandaid on it that needs to be replaced every time it loses a bit of adhesive. Companies that are “too big to fail” continue to make irrational decisions and have nothing to worry about because the government will save them; this is not capitalism. The obvious long term effects of handouts is inflation; even though Mnuchin and Powell are more worried about deflation than they are of inflation, inflation remains the real fear in the long term. Loose monetary policy that Jerome Powell has constructed has kept this economy and stock market together; never in the history of the U.S. have such monetary policies been practiced. Letting inflation run in order to raise the average rate just above 2% in order to maintain interest rates at almost zero for years to come in order to encourage borrowing and spending.
The bottom line is that we are in desperate times, the shock that this country experienced from the sudden shutdown called for desperate measures. Policy makers did not have the data nor the time to make rational decisions based on the conditions of local governments when it came to the first stimulus. It has been months since then, and we expected a more focused fiscal policy on sectors that are more deeply affected. The trouble now is the politics that are involved; almost impossible to come to a bipartisan consensus on this matter.
When it comes to trading this market, it remains extremely difficult to remain patient with the volatility that one headline about Pelosi or one Tweet from the President causes. It is best to trade small and stay hedged; Gold is the best hedge against the long term effects of inflation.
