More Money, More Problems… The Real Cost Of The Stimulus
Short Term Deflation
Many of you may have noticed a lot of sales lately from your favorite stores. Most of these sales are happening because they want to get the consumer to spend more and while that may mean you get to buy some great items at a steep discount, that price comes at a heavy toll for businesses. As businesses are forced to lower prices there is pressure put on margins, in other words, businesses won’t be making as much money per each sale. This actually creates a downward spiral as businesses have to adapt, which leads to layoffs and then people who are laid off don’t have as much to spend and therefore can’t purchase goods and the business have to make bigger decisions on if they want to keep on this downward spiral, layoff more workers or worse go out of business. Already, the Small Business Association estimates that every hour one business is going under or closing its doors.
Long Term Inflation
Many of you out there may be quick to point out that all this money flooding the market must come at some cost, right? That is correct! While many of us worry about inflation every year because it feels like everything is going up except our pay; currently, it is likely only being felt in our financial markets. This would actually explain why the stock market has continued to rise despite all of the bad news. How could some of these stocks be close to, equal to, or greater than pre-coronavirus? That’s because all of the money being injected into the financial markets is propping them up.
But what about consumers? This is still uncertain as Main Street has received very little from the government as compared to companies on Wall Street. Many are starting to see a strong disconnect between Wall Street, where stocks have risen 30% from the lows despite unemployment being over 32 million and the highest percent wise, since the Great Depression. Furthermore, all of the stimulus money and bailouts will cause a significant rise in inflation when interest rates eventually rise.
At the end of the day uncertainty is what drives the stock market and real estate market crazy. Whether you agree with stimulus and bailouts, the fact is that the government has already shown it is willing to foot the bill in order to stop the pandemic first and worry about the possible long term effects on the economy later. How that will impact you depends on where you are in your life and how you view your investments. If you are likely in a financial crunch, the next few years will likely be tough as headwinds from the pandemic will continue to put pressure on businesses and consumers. Let’s also not forget that a lot of these companies are over leveraged on ‘cheap money.’ At some point these lines