Why The Second Stimulus Won’t Have Much Economic Impact

High-frequency data like credit card spending and main-street activity indicators tell us this is the case.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

Given that stabilization of activity, it will require more dollars to generate economic growth in the future. As shown, it will need $7 of debt-supported expenditures to create $1 of economic growth.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

Here is the exciting part. That is NOT a new thing. As I discussed just recently, “The One-Way Trip Of American Debt:”

The “COVID-19″ crisis led to a debt surge to new highs. Such will result in a retardation of economic growth to 1.5% or less, as discussed recently. Simultaneously, the stock market may rise due to massive Fed liquidity, but only the 10% of the population owning 88% of the market benefits. In the future, the economic bifurcation will deepen to the point where 5% of the population owns virtually all of it.

As I noted previously, it now requires $7.42 of debt to create $1 of economic growth, which will only worsen as the debt continues to expand at the expense of more robust rates of growth.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

 

You Can’t Use Debt To Create Growth.

As noted above, more debt doesn’t lead to more robust rates of economic growth or prosperity. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the change in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

Another way to view the impact of debt on the economy is to look at what “debt-free” economic growth would be. In other words, without debt, there has been no organic economic growth.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

The economic deficit has never been more significant. For the 30 years from 1952 to 1982, the economic surplus fostered a rising economic growth rate, which averaged roughly 8% during that period. Such is why the Federal Reserve has found itself in a “liquidity trap.”

Interest rates MUST remain low, and debt MUST grow faster than the economy, just to keep the economy from stalling out.

The deterioration of economic growth is seen more clearly in the chart below.

From 1947 to 2008, the U.S. economy had real, inflation-adjusted economic growth than had a linear growth trend of 3.2%.

However, following the 2008 recession, the growth rate dropped to the exponential growth trend of roughly 2.2%. Unfortunately, instead of reducing outstanding debt problems, the Federal Reserve provided policies that fostered even greater unproductive debt and leverage levels.

stimulus economic impact, Why The Second Stimulus Won’t Have Much Economic Impact

Coming out of the 2020 recession, the economic trend of growth will be somewhere between 1.5% and 1.75%. Given the amount of debt added to the overall system, the ongoing debt service will continue to retard economic growth.

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