MacroView: More Stimulus And The 2nd Derivative Effect

There is currently much hope for another fiscal stimulus package to be delivered to the economy from Congress. While President Trump recently doused hopes of a quick passage, there a demand for more stimulus by both parties. While most hope more stimulus will cure the economy’s ills, it will likely disappoint due to the “2nd derivative effect.”

Let me explain.

In March, as the economy shut down due to the pandemic, the Federal Reserve leaped into action to flood the system with liquidity. At the same time, Congress passed a massive fiscal stimulus bill that expanded Unemployment Benefits and sent checks directly to households. As shown in the chart below of the upcoming expected GDP report, it worked. (We estimated GDP to increase by 30% from the previous quarter.)

(Click on image to enlarge)

stimulus 2nd derivative effect, #MacroView: More Stimulus And The 2nd Derivative Effect

That expected 30% surge in the third quarter, and surging stock market to boot, directly responded to both the fiscal and monetary stimulus supplied. The chart below adds the percentage change in Federal expenditures to the chart for comparison.

(Click on image to enlarge)

stimulus 2nd derivative effect, #MacroView: More Stimulus And The 2nd Derivative Effect

The spike in Q2 in Federal Expenditure was from the initial CARES Act. In Q1-2020, the Government spent $4.9 Trillion in total, which was up $85.3 Billion from Q4-2019. In Q2-2020, it increased sharply, including the passage of the CARES Act. Spending for Q2 jumped to $9.1 Trillion, which as a $4.2 Trillion increase over Q1-2020.

Those are the facts as published by the Federal Reserve. From this point forward, we have to start making some estimates and assumptions.

Assuming CARES-2

During Q3-2020, not much happened as the Government was fighting over the next round of stimulus. As such, spending fell back to a more normal level of increase. However, if we assume that a second CARES Act is passed some time in Q4, and we apply a price tag of $2 Trillion to the package, it would represent a roughly 25% increase in Government spending over Q3-2020.

(Click on image to enlarge)

stimulus 2nd derivative effect, #MacroView: More Stimulus And The 2nd Derivative Effect

Such is the “second derivative” effect we mentioned previously.

“In calculus, the second derivative, or the second-order derivative, of a function f is the derivative of the derivative of f.” – Wikipedia

In English, the “second derivative” measures how the rate of change of a quantity is itself changing.

I know, still confusing.

Let’s run an example:

As Government spending grows sequentially larger, each additional round of spending will have less and less impact on the total. Going back to 2016, not including the CARES Act, the Government increased spending by roughly $50 billion each quarter on average. If we run a hypothetical model of Government expenditures at $50 billion per quarter, you can see the issue of the “second derivative.”

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Gary Anderson 4 days ago Contributor's comment

The new normal of slow growth has been attributed to lack of dollars jn the Eurodollar market. Asset inflation without prosperity for 50 percent of Americans means the Fed itself should bypass the fiscal authorities and dispense helicopter money directly to citizens.