The burning topic in the media, on Wall Street, Capitol Hill, and for Emerginvest & international markets this week has been the shaping of the US stimulus package. In some of the first political moves of his presidency, Obama made headlines with an unusual visit to Capitol Hill asking for bipartisan support for the US stimulus package. The first version of the bill passed in the House with a 244-188 spread, with not a single Republican vote (11 Democrats voted “no” as well), and looks like the final bill will pass somewhere in the $900B range (some argue over $1 trillion).
The need for government support is unquestionable, evidenced yesterday with a maelstrom of negative economic news announcements including in such areas as housing starts, unemployment, and business purchases, which wiped out the entire stock market’s gains from the last week in a few hours of trading.
According to a NYTimes article: “Reports Underscore Weakness of the Economy,” the Commerce Department announced that data demonstrates “American businesses ordered fewer durable goods – like computers, construction equipment and vehicles – in December, cutting the prospects for growth as companies braced for a difficult 2009. Orders of durable goods dropped 2.6 percent last month, to $176.8 billion.” It also described how new home sales fell 14.7% in December, and that unemployment was higher than expected. This, coupled with the continuing problems in the credit markets, dropping housing prices, the banking industry, and consumer demand, underscores the need for immediate government action to stave off a catastrophic meltdown of the economy.
However, in the rush to act as swiftly as the government can, three major factors are being pushed aside: the amount in question, the executable strategy to distribute the stimulus, and the methods of paying for it. These factors are certainly not being ignored – they’re in countless media articles, at the forefront of committee discussions, and fodder for innumerable lobbyists – however they are clearly taking a backseat to the desperate need for immediate stabilization as unemployment continues to swiftly rise.
While the idea of having a trillion-dollar stimulus package is shocking, many agree that it will not be enough to significantly stem the tide of mounting economic problems. In another NYTimes article, “Geithner Says Plan for Banks Is in the Works,” it states:
But administration officials believe that trillions of dollars more may be needed to buy the majority of bad assets from banks.
"The size of the problem is so large that no one knows if you just wiped out all the assets, how much it would cost," said Senator Charles E. Schumer, Democrat of New York and vice chairman of the Joint Economic Committee. He added that a number of officials estimate it may take up to $3 trillion to $4 trillion to buy the bad assets.
This is exceptionally troubling given the current political explosion with the $1 trillion stimulus package. Countless corporate lobbyists are each advocating for a piece of the package, and political parties are engaging in heated debates over the size and the structure of the current package, with most Republicans advocating for a more tax-centric plan rather than government spending. If Charles Schumer is correct, additional packages might attempt to navigate an already politically-charged and divided Congress.
Secondly, the sheer logistics of structuring, and then spending $500 billion of government money is staggering. An example is the education department.
Currently, the federal spending on education is approximately $60 billion, which accounts for roughly one tenth of the nation-wide spending on education, the rest of which is taken care of by the states. According to the article Stimulus Plan Would Provide Flood of Aid to Education, the stimulus package would add an additional $79 billion – more than doubling the entire current budget. The article states that:
…some education experts from across the political spectrum in wondering how school districts could spend so many new billions so fast, whether such an outpouring of dollars would lead to higher student achievement, and what might happen in two years when the stimulus money ends.
Granted, the idea of revamping needed infrastructure like new buildings or equipment is appealing, but there is a point of scale when you give an organization like a school district only 12 months to spend double their current budget. The article also quotes Terry Hartle, “a senior vice president for public affairs at the American Council on Education,” stating: “But Mr. Hartle said that even he was having difficulty tracking all the new spending. ‘A lot of things will go through, and only later will we know exactly what happened,’ he said.”
The point is that while the prospect of force-feeding government spending money to institutions in such a short time frame will help spur the economy in the short term, it seems inevitable that without the proper time to plan and oversee the spending, the government is sacrificing the utility it could otherwise get out of those dollars. The education problem is a prime example of the complexities in dolling out billions of dollars in a frenzy to spur the economy - it creates an environment where hasty spending decisions can lead to waste and inefficiency.
The question of how to pay for the stimulus is the last political and financial specter swirling around the mainstream media. It is no secret that the government has been funding much of the bailout packages to date by printing exorbitant amounts of additional US dollars, in addition to taking on an equally high portion of US debt.
More inline with Emerginvest’s global perspective, a final NYTimes article entitled: Global Worries Over U.S. Stimulus Spending, examines the international implications of the US spending. It argues that while many international experts agree that the US must go forward with a stimulus package, it could hold dire consequences if the government overspends by printing dollars and taking on debt. It states:
“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”
In addition to maintaining international equity markets, another concern, both for international currency markets, and US nationals, is the threat to the long-term value of the US dollar.
“There aren’t that many safe havens," said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened.
Instead, it is the dollar’s long-term value against other currencies that is vulnerable. "At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets," Mr. Blinder said.
In conclusion, the US is speeding along a path to massive spending, in order to stave off an economic collapse, and in doing so, major concerns such as the size of the total relief needed, execution of the spending, and the methods for paying for such measures, are largely being ignored. It seems as if there are no other reasonable alternatives however – by its very nature, if the government took the proper time to analyze and execute the proposed measure over the next year – it would have acted too slowly to help the current ailing economy, negating most of the positive effects. That being said, there is no doubt these issues will continue to dominate the political, and financial headlines in the coming year, and will greatly shape the future of the US economy.
Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world.