Sugar Rush! Why The Economy Will Run Hot, Then Crash

Those numbers continue to rise.

Sugar Rush Economy Crash, Sugar Rush! Why The Economy Will Run Hot, Then Crash.

Without government largesse, many individuals would be living on the street. The chart above shows all the government “welfare” programs and current levels to date.

The problem with “stimulus programs” is that you can see the immediate subsequent contraction once the benefit depletes. Since 1/3rd of incomes dependent on government transfers, it is not surprising that the economy struggles as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.

Sugar Rush Economy Crash, Sugar Rush! Why The Economy Will Run Hot, Then Crash.

In fact, in the ongoing saga of the American economy’s demise, U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression.

Such occurs when the current administration remains enthralled with finding some universe where socialistic programs lead to sustainable economic growth.

It doesn’t.

 

The Coming “Crash”

As the stimulus hits consumers, they spend it rather quickly, which leads to a “sugar rush” of economic activity. Such as:

  1. Consumers use the funds to make either necessary or discretionary purchases creating demand.
  2. In anticipation of demand, companies boost “inventories.”
  3. The boost in “inventory stocking” boosts manufacturing metrics.

We are seeing this currently as manufacturing and inventory metrics surge.

As shown, the stimulus will lead to a short-term boost in PCE, which will correspond with increased economic growth. (PCE comprises nearly 70% of the calculation.)

Sugar Rush Economy Crash, Sugar Rush! Why The Economy Will Run Hot, Then Crash.

However, there is a “dark side” to stimulus-fueled activity.

  1. Since companies know the stimulus is “temporary,” they don’t make long-term hiring and capital expenditure plans.  
  2. The increase in activity leads to an inflationary rise that companies have difficulty passing on to consumers, ultimately reducing profit margins.
  3. Again, since companies know the stimulus is temporary, they opt for “efficiencies,” such as outsourcing and automation, to lower labor and production costs. 
  4. After the stimulus gets depleted, consumers struggle with higher costs which further deteriorates their standard of living. 

Unless the Government is committed to a continuous stimulus, once the “sugar rush” fades, the economy will “crash” back to its organic state.

Sugar Rush Economy Crash, Sugar Rush! Why The Economy Will Run Hot, Then Crash.

The bottom line is that America can’t grow its way back to prosperity on the back of social assistance. The average American is fighting to make ends meet as their living cost rises while wage growth remains stagnant.

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