It could be a moment in the morning in America that will further boost an economy already set to burst, reduce economic inequality and elevate Biden to the kind of economic hero status enjoyed by people like Franklin Delano Roosevelt after the Depression and Ronald Reagan during the boom. 1980s.
Or it could be a fire accelerator for global markets, as gasoline prices rise, home prices soar, speculative assets soar, and investors increasingly fear the kind of strong spike in inflation that they can hit with speed. notable if the government spills too much gasoline in an economy that is already heating up.
It will be a moment of glory for Biden when he signs the new act of relief in the next few days, the centerpiece of his initial agenda. But a sunny end is not entirely guaranteed, with the nation taking an almost entirely new path in managing the economy.
“If it works out, Biden will be seen as a hero and he will deserve it,” said Len Burman, an economist at Syracuse University and a co-founder of the Tax Policy Center. “This is the first time that we have actually provided enough stimulation and the risk is that it will be too much. And inflation is a real risk. But if it malfunctions, at least we will know the result of a great experiment like this. “
The imminent promulgation of the American Biden Rescue Plan comes at a time when the economy is already showing signs of recovery with Covid’s vaccination accelerating and states lifting further restrictions.
The economy created a surprisingly high number of 379,000 jobs in February, with expectations of much larger numbers ahead, with the reopening of bars and restaurants and Americans starting to travel again in much larger numbers.
The chief executive’s confidence has recently reached its highest level in 17 years, as companies are gearing up for a return to something close to a normal economy later this year. Small business confidence is also growing, albeit at a more cautious pace. Consumers in the world’s largest economies also have about $ 3 trillion in extra money accumulated during virus blockages, meaning that demand for everything from travel to cars to new merchandise is likely to increase even more.
Signs of inflation are already appearing across the country, with gas prices going up and probably going up. Prices for new and used cars are also rising, as are home prices in many markets, creating concern among lawmakers that people are losing their prices.
And then there are the high stock markets and widely speculative assets like Bitcoin, which continue to skyrocket amid record low interest rates and gigantic cash infusions in the Federal Reserve and Congressional systems.
Nasdaq advanced more than 400 points on Tuesday, or nearly 4 percent, in the market’s latest euphoria. GameStop, the “meme stock” driven by chat room merchants, has gone up almost 27 percent and electric car maker Tesla has gone up almost 20 percent.
Millions of Americans will soon receive thousands of dollars in stimulus payments along with expanded unemployment benefits, a huge expansion of child tax credits, much more generous health benefits and targeted relief for small businesses, particularly those belonging to people of color and women. .
Progressives hailed all these things as major advances that will boost the economy in the short term and possibly reduce the economic inequality that only worsened during Covid.
And many economists also note that the need for more relief among large groups of Americans is still alive. The country remains about 11 million below the number of jobs that would have existed without Covid’s blockades. The unemployment rate remains high at 6.2 percent and would be closer to 10 percent if the millions who left the workforce during Covid – a number dominated by women – were included.
While Republicans almost uniformly complain that Covid’s package is too big and wasteful, economists generally adopt a more subdued tone.
There is certainly a chance that it will be too big, they say, and could lead to sharp price hikes and faster increases in Fed interest rates. Technology stocks, meme stocks and crypto assets can be hit. But that may not necessarily be a bad thing if the bubbles deflate slowly and not all at once.
“In fact, there is no choice but to provide this type of support, and we have lived with sub-ideal inflation for almost two decades,” said Mark Zandi, chief economist at Moody’s Analytics. “Bring inflation. Let’s see before we worry about that. And interest rates are very low, anyway. Investors are not prepared for higher rates and inflation ”.
“The markets are frothy,” added Zandi. “And it wouldn’t be bad to get some starch out of them sooner or later, before those bubbles inflate much more.”
This is the most optimistic view of the new money rain about to cascade over the United States: a mild readjustment in the markets, slightly higher interest rates in the economy and much less unemployment, along with a sharp reduction in economic inequality. It is the scene of Biden’s dreams.
The most worrying prospect is that a huge excess of consumer savings – filled with even more stimulus checks and a final pandemic – will create a massive spike in demand without enough supply to serve it. That would mean sharp price increases that could force the Fed to several rate hikes earlier than anticipated.
This increase campaign would make borrowing costs much more expensive for consumers, while their purchasing power would decrease. It would also make the cost of servicing the growing national debt much higher and possibly undermine Biden’s hopes for a multi-trillion dollar stimulus package, which already faces strong opposition from Republicans.
“Our debt is clearly on a totally unsustainable path and we just don’t know if rates are going to stay that low forever,” said Burman. “If markets got the idea that the United States was no longer a safe haven, rates could go up very quickly. This is not a ‘now’ problem. And it makes sense to invest in smart things now. But it can become a problem. “
Even before a new stimulus, economists had expected very robust growth in 2021, as the nation – hopefully – escaped Covid’s tractor beam. Adding the new stimulus has estimated gross domestic product growth for the year of around 7% or even more, figures not seen since the 1980s.
This growth can lift people out of poverty, raise wages in a non-inflationary way and bring Biden to the status of an economic hero. Or it could trigger the kind of inflation that vaporizes consumers’ purchasing power and attracts overwhelming increases in Fed rates.
“There are clearly policymakers – in particular those on the left – who have forgotten how damaging inflation can be,” said Steven Ricchiuto, chief economist at Mizuho Securities, in a note to clients. He added that he wasn’t too concerned about that – at least for now.