A while back, the US government decided that the US economy was in danger of sliding into a recession. Traditionally, one of the methods to prevent a recession or to minimize the impact of an economic slowdown is for the Federal Reserve bank to lower the federal funds rate which indirectly affects the prime rate – a number which affects consumer and business loans. The purpose of lowering the rate is to make it easier for individuals and businesses to borrow money and spend it on consumer goods or business spending which will help increase economic activity. Another method is to cut taxes to stimulate the economy.
Fed policy 2008
So far in 2008, the Fed has decreased the federal funds rate from 4.25% to 2.25% – a drop of 2% over two months which is quite dramatic and indicates that the Federal Reserve is deeply concerned about the probability of a recession. The head of the Federal Reserve, Ben Bernanke, is a student of the Federal Reserve policies of the great depression and believes that Federal Reserve actions at the time turned an ordinary recession into a major depression. One of the key actions of the pre-depression Fed was to keep rates high which ended up choking the economy into a depression. Needless to say, Bernanke is quite keen to avoid the second great depression which is why he has acted very quickly to loosen the money supply and avoid the same mistakes made 80 years ago.
Economic Stimulus Check
Starting this week, US residents will start receiving money from the government in the form of an “economic stimulus check“. This money is a plan by the government to give money to Americans so they can spend it and help stimulate the economy. It will be interesting to see if this payout has any effect on the US economy or it if can even be measured accurately.
Why doesn’t the government just spend this money itself? This is what normally happens with government money, however it’s an election year in the US and like everywhere else in the world – politicians like to buy votes! In theory it shouldn’t matter whether the government spends money on infrastructure projects or gives it to the voters to spend on big screen tvs, either way the money gets into the economy. It’s much quicker however, for consumers to buy big tvs and go on vacations than it is for the government to plan for and implement it’s own projects. Also, someone who is enjoying election night coverage on their brand new high definition plasma tv might be more inclined to vote for the party that bought the tv for them.
What to do with your stimulus check?
I don’t think the economic stimulus package will really do much good or much harm – and since it’s already a done deal, then my opinion doesn’t matter too much. If you are a recipient of some stimulus money then don’t listen to all the government propaganda about how you have to waste this money on consumer goods and vacations. It’s your money and you should do whatever is best for yourself and your family.
My suggestion is to apply the stimulus money according to your current financial plan. If you are working on paying down debt, then pay off some debt with it. If you are putting all your extra money towards retirement savings, then that’s where the stimulus money goes. If you happen to be savings for a big tv or vacation – then by all means, apply this money for those purposes since that’s what your financial plan calls for. If you don’t have a financial plan then put the money into a high interest savings account and create one!
How much are these stimulus checks?
The basic payout is up to $600 per adult and $300 for eligible children under 17. There is an income limit so if you make over $75,000 (adjusted gross income) then the rebate gets reduced by $50 for every $1000 of income earned over $75,000 which means the maximum income to get any money would be $86,000. A typical family of four could get up to $1800 which is not too bad!
When will the stimulus checks get paid out?
The original plan was to start sending out the stimulus checks in May however it was just announced that the schedule was moved up and checks will start going out on Monday, April 28. The mailing schedule is staggered and it will take about two months for all the money to be dispersed.
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Very informative post! And thanks for the link.
Nice, accurate post, Mike! It is so true that Americans should not feel like they should or have to use their stimulus money towards consumerism! I am thinking of applying my stimulus check and my tax refund to a small debt that I have.
I wonder how much this kind of measure really cost to the US Gov. I mean, since most people don’t have a solid financial background, chances are that they will waste their money on Tv’s and vacation.
Therefore, the US Gov should get a good part of this money back in taxes and jobs kept since people continue to spend.
This is a rather backward plan. The US government is giving taxpayers money by increasing government debt. The government debt belongs to taxpayers, so they are effectively taking out a payday loan on behalf of taxpayers.
I’m going to use my stimulus check to stimulate the Costa Rican economy. Business idea: start a margarita stand on the beach in Liberia before I get there.
While I fully intend to spend the stimulus money, I still feel the idea is akin to sticking a band-aid on a spurting artery. It may stop the blood briefly but a bleed out remains inevetable
Thanks for the great comments!
Mike
brother can you spare a dime …!!! this is a slap in the face of hard working americans…!!!…our dear president can give his big corperate buds plents more than a peasley 600 rebate and think of the trillions we have thrown away in iraq on a vietnamese type war…!!!…next time we elect a president let’s do ourself as americans one big favor…do not vote anyone in that will carry the beliefs and morals of george bush…he has made a mockery of a once proud land…!!!
Al, you hit the nail on the head. The stimulus check is being funded with debt—debt all tax payers are on the hook for.
Also, regarding any stimulus effect…there won’t be one, at least not a recognizable positive impact. Spending a few bucks here and there won’t do anything for the economy. Businesses are wise enough to recognize the difference between a one-time chance (stimulus checks) and the possibility at repeat business (lower tax rates).
“In theory it shouldn’t matter whether the government spends money on infrastructure projects or gives it to the voters to spend on big screen tvs, either way the money gets into the economy.”
There is a huge difference between the government spending money and the public spending our money. When the government puts money into the economy, the government furthers the government’s interests. When we spend our money, we spend our money on things that enrich our lives. Businesses observe where we spend our money and then they invest time, money, and energy to win our business.
The same is also true when the government spends our money. Businesses spend their time, money, and energy courting the government’s business.
Hey FP, a little late to the punch, but you present some oft-overlooked information here: Ben Bernanke, is a student of the Federal Reserve policies of the great depression
I’ve heard others posit that the way out of the recession is actually the inverse and that the Fed should be raising the rate! Personally, I believe that the outcome is going to be the same either way.
The US has so many deficits, so many debts to repay, that changing interest rates won’t make any difference. Interest rates and debt spending are not going to solve the problem that the US fundamentally consumes more than it produces.
Bernanke can do whatever he wants, the US economy is headed for a recession. It doesn’t matter if interest rates are 1% or 10%, forces of globalization will cause the world’s largest economy to shrink. Money has to flow from the big pile to the little pile.
There’s still a ton of power-grabbing and holding on to the last vestiges of American wealth, but it’s really all hit a plateau out here. The commodity prices are up and wages aren’t. Inflation is going to “kick it up another notch” over the summer when gas prices go up and everything gets even more expensive.
Right now, Bernanke is setting up for an inflationary recession. Heck at 2.25% Fed Rate we’re basically already there. Inflation has been around 3% for the last decade and a quick look around indicates that it’s going to be higher this year. Honestly, I figure that the Fed and Gvmnt can get by for a couple of years with low interest-rates and high inflation before enough people step up and take notice.
But short of some form of territory / commodity acquisition (say a war), I don’t really see any way out of this that doesn’t involve a significantly reduced quality of life for the average North American.
Gates, never too late!
The fact is with macro-economics is that nobody knows how they work. Even today, it’s not certain what caused the depression or if it could have been reduced at all.
As you say, the coming recession might not be in anyone’s control.
Mike
The fact is with macro-economics is that nobody knows how they work.
I’ll keep that one quote in my back pocket
But in this case, I think it’s selective vision and the hammer/nail problem (when all you have is a hammer, every problem looks like a nail).
The government is relying on the Fed to “manage the economy”, but the Fed has only one tool: interest rates. The Fed is supposed to “manage inflation”, but again, one tool, “big hammer”, and this isn’t a “nail” problem.
Right now, interest rates are not driving inflation. Inflation is being driven by globalization (1) and the dropping value of the USD (2). (1) is going to happen and the biggest economy is going to suffer, not much the Fed can do here, 20% government bills are not going to stop people in China from opening new factories.
(2) is the result of US government policy. Low interest rates will cause a slow-down of foreign investments, but won’t stop the impending inflationary recession. Really high interest rates would likely garner some foreign investment (despite poor trust in the USD), but it would immediately devalue existing currency, drive inflation and destroy growth as all of the money moved to the high-interest “guaranteed” payouts.
I can’t argue with Bernanke’s move, but the Fed is really the wrong tool here. The US government needs to provide international investors with a higher level of trust in the value of the USD and interest rates aren’t the solution (b/c they aren’t the problem). “Inventing” money via the stimulus check is also a bad idea. International investors will see right through the BS and it will serve to do nothing but devalue existing currency even more.
The Financial Blogging community have all patted themselves on the back by saying that they’re going to “save & invest their stimulus check”, but they’re really missing the point. Investing the stimulus check is the least that they can do to protect their existing financial assets. If you have money, what you really want to do is ask the government to stop printing money so that your assets aren’t “inflated away”.
When & how will our checks come in. Will they be Automatic Deposit, one check, separate checks?
J & P – you get the checks the same way you do your taxes ie if you are set up with auto deposit then that’s how you get the money.
I have not recieved my Stimulus check.