By Mike Shapiro
March 5, 2021

I’m conflicted because of the apparent dichotomy between what we need to do and what we should do: on the one hand, I fully support the $1.9 trillion stimulus plan because I know we need it. And on the other hand, I’m in the camp that it may be too much at once.

And I think that a lot of people share both sentiments.

While no one disagrees about the need for more stimulus, the debate is about the potential inflationary impacts of such a huge infusion of cash into our economy.

Will it dampen down the value of the U.S. dollar and lead to a level of inflation beyond the Federal Reserve’s target ideal of two percent? It’s likely. But the alternative—a significant cut to the level of funding—is one that we experienced during the recovery from the Great Recession. In hindsight, most analysts agree that $930 billion or so in stimulus funds then were likely not enough and not put into the right hands, the hands of the people that needed the help the most.

Let’s take a look.

One year ago vs. today

There’s no getting around it: the world was vastly different just about a year ago.

In the U.S., we were riding high:

Unemployment was at or near record-low levels
The economy’s prolonged growth since the early months and years of the Great Recession continued
Stock markets were strong
Residential real estate prices were rising based on low interest rates for mortgages, a healthy economy and declining inventory but still, homes seemed to be within reach for a large swath of middle-income Americans.

Certainly, there was concern that the upward trajectory couldn’t last much longer -- many economists and analysts predicted a mild recession was in the making, simply because of the need for a bit of settling down in the economy.

And while Covid-19 was emerging as a threat, most of us hadn’t masked up yet. Schools and businesses were still open and most of us felt concerned and curious, but not gobsmacked.

We had no idea what was just around the corner. Fast-forward to today and nearly everyone has been touched by the impacts and horrors of the pandemic.

Now, there’s also reason for hope: Widespread vaccination is underway and a tip of the balance of power in Congress bodes optimistically for middle-and lower-income households that have been hit hard. And many aspects of the economy are doing well, including the stock market.

Things are looking up, generally—unless you’re in the hardest-hit industries, like hospitality, restaurants and bars, and travel and a slew of low-wage jobs.

For millions of people in that bucket, stimulus funds are needed to keep them housed, to put food on the table and to bring back the jobs they depend on. (Unemployment is currently around 6.3% but because of the way it’s tracked, in all likelihood, it’s likely higher and has disproportionately impacted lower-wage workers.)

It’s impossible to predict how the stimulus funds will impact overall economic recovery and jobs and a lot will depend on unknown factors, such as the effectiveness of mass vaccinations and our collective ability to stave off surges from Covid variants.

We can’t wait until we have all the answers, though. We have to do what we can to reduce and reverse ongoing suffering for millions of people.

Resulting inflation

Still, and although I support it, stimulus isn’t without risks.

I called this post “Mini-inflation” Nation because by most accounts, inflation will result from the stimulus funding. But as I see it, the predicted inflation will be relatively low, slightly exceeding the Fed target.

Inflation occurs when the purchasing power of a dollar is reduced: What you can buy for $1 today, for example, would cost $1.02 after inflation of 2%. While that seems minor in this example, it adds up in our $21+ trillion economy. It also adds up when you’re on a fixed income or if you’re a low-wage earner.

A reason inflation can occur alongside a huge infusion of liquidity is that when there are more dollars floating around and fewer goods to spend them on, the prices go up and the purchasing power of the dollar goes down.

Interest rates typically rise to combat inflation and that’s not always a bad thing—it means that some interest-bearing savings and investment vehicles could provide safer places to generate income. The risk is that we depress the very nature of what we’re trying to accomplish. Any inflation could be another blow to lower-income households during a recovery and longer term, inflation impacts most aspects of a recovery, because it raises the cost of goods and services and tends to slow hiring.

Bonds and interest rates

There’s also been a flurry of attention on bonds. What do they have to do with all this?

In our society, debt is front to equity—it’s leveraged to create wealth. Interest rates are yields on loans (aka, debt), forming the basis of banking and our economy. U.S. Treasury 10-year bonds are the interest-rate benchmark used for just about every kind of bank loan, from mortgages to business loans. And rising interest rates equate to higher levels of risk and default. (U.S. Treasury notes, bills and bonds are tradable securities with differing maturations, from Treasury bills of a year or less to bonds, with a minimum maturity of 10 years.)

Simply put, then, U.S. Treasury notes reflect borrowing costs and debt risk in the overall economy and with all investments, the higher the yield, the higher the risk (of note, too, in a defaulting company debt is paid before equity.)

Bond prices and stocks often move in opposite directions because getting yield in inherently safer securities (Treasury debt instruments, which are essentially considered zero risk by most measures) is more reliable than getting equity with inherently more risk—less risk, less reward.

In a typically strong economy with low inflation expectations, changes to bond yields wouldn’t have a significant impact on stocks. Currently, though, with the tremendous volatility in the markets, we did see stocks falling.

In a recent letter to shareholders (excerpted here from CNN), my favorite investor, Warren Buffett, indicated that he sees parallels to the 1980s bond-market meltdown. In my opinion, he may very well be right, in that the overarching result is the same. However, there are vulnerable groups, like seniors on fixed incomes, that would rejoice in having much higher yields. Remember, though, that if increasing yields are due to inflationary pressure, the end result is not real additional income.

Why a “happy medium” is unlikely

A $1.9 trillion infusion at once will help to some degree, but much of it will also end up back in the stock markets—which are already highly volatile and rising at a ferocious velocity—and invested in other ways that ultimately benefit those who need it the least, like the wealthy and upper-middle class.

In my opinion, an infusion of $1 trillion today with the option of further stimulus down the road would be the ideal—get people cash now, when they need it most, to help them pay rent and mortgages, bolster small businesses, reduce pandemic-related deficits in cities and states across the U.S. and get some key industries back on track. In an ideal situation, we’d evaluate the return on investment from that first round of new capital, then add more as needed.

Perspectives on the stimulus plan’s challenges are further clarified in the excellent March 4 Washington Post article, “As Senate Rushes $1.9 Trillion Bill through Congress, Biden Faces Doubts over Whether it’s Still the Right Package,” by Jeff Stein, Heather Long and Erica Werner. Here are a few of the conflicts and concerns:

“The pandemic was exacting a brutal toll when, six days before his inauguration, President-elect Joe Biden first released his $1.9 trillion relief proposal. The economic recovery was backsliding, coronavirus cases were surging, and vaccines were just starting to get out…For policy experts and even members of Biden’s own party, the improving picture is raising questions about whether the stimulus bill is mismatched to the needs of the current moment.”
“Biden has repeatedly argued that the risks of spending too little to help the economy outweigh the risks of spending too much. White House officials have also cited polling showing Biden’s relief plan is broadly popular with Americans, including a majority of Republican voters.”
“And even those who say the bill could be better targeted have acknowledged that Democrats’ urgency is being fueled by an impending deadline—March 14—when tens of millions of Americans will begin to lose unemployment benefits if no action is taken.”
“The Congressional Budget Office has estimated the U.S. economy is running about $600 billion to $700 billion below potential because of the pandemic. This is the shortfall that many experts say the government should try to fill, but they point out that it’s a lot less than Biden’s proposal.”
“Citing the improving economic outlook, House Republicans were united in voting against Biden’s bill last week. Virtually all Senate Republicans are expected to oppose the measure as well. ‘It’s of a size that might have made sense a year ago…this is not a year ago,’ Senate Minority Leader Mitch McConnell (R-Ky.) said Tuesday. ‘We’re making extraordinary progress with the rollout of the vaccines.’”

Ultimately, though, I agree that the risks of doing too little outweigh the risks of doing too much, so let’s err on the side of compassion and keep moving forward.

“Mini-inflation” Nation?

IPOs: the real costs and opportunities

Perspectives on home equity