Yes, the government's spending program does, indeed, create new consumer burdens; however, it is possible that the stimulus program will better enable consumers to lower their debt. Of course, for the stimulus program to work, the expenditures have to be responsible and effective. For the purpose of discussion, let us assume that the Obama administration will spend the money as effectively as possible. With that set aside, let us look at the ramifications of this massive expenditure program.
Indeed, the consumer will see additional burdens in the years to come. These burdens will come in one or many of the following forms:
- Inflation
- Lower dollar value
- Higher taxes
- Slower economic growth
Inflation, lower dollar value (as measured against other currencies), and higher taxes all have the same impact to the consumer: Given a fixed paycheck, they take away from that paycheck's actual value. Slower economic growth means, among other things, that it will be harder to argue for a pay raise to offset the hit on the paycheck's value erosion.
First, let's put things in perspective.
The Bush administration came into the office under unusual economic circumstances: It inherited the largest budget surplus ever. Driven ideologically, the Bush administration proceeded with one tax cut after another while creating new expenditure obligations and entitlement programs. This was the only administration in history to push for tax cuts while waging wars. Not surprisingly, the end result after eight years was the biggest budget deficit in history.
Deregulation is a longer historic arc which began in the 1980s. As regulatory bodies were weakened, financial crises became more common: The Savings and Loans failings of the 1980s, Long Term Capital Management in the 1990s, Enron in early 2000s, and the collapse of the financial industry in 2008. Recent profit reporting by various financial houses are also suspect. In essence, it is difficult to tell who has clean books and real profits any more.
These set the backdrops in which the Obama Administration must operate, thereby framing the problems that they have to deal with and the limited solution set. One point is worth making: I am not indicating that deregulation or tax cuts are necessarily good or bad; I am only indicating that as they were implemented, they had certain, unpleasant and unfortunate ramifications.
The Bush Administration handed a self-amplifying double whammy to the Obama Administration: A financial crisis and a failing economy. As the financial crisis deepened, credit became harder to get. As credit became harder to get, the economy suffered more. And the ever increasing suffering economy further exacerbated the financial crisis. The Obama administration had to stop the financial crisis and boost the economy simultaneously, and do so at a time when America already had a record budget deficit. The solution that the administration chose was to pump liquidity into the financial sector (keeping zombie banks alive) and massively increase government spending (with the goal of creating jobs, albeit this is questionable) while having limited latitude to raise taxes.
As any consumer knows, when you spend more than you earn, you burn up your savings. If you do not have any savings, you get deeper into debt. In the US, we are getting deeper into debt, and we are financing this debt through foreign borrowing. To keep the foreign money coming in, the US will have to increase interest rates to keep US bonds an interesting buy. The interest rate hike will hit every consumer by making borrowing more expensive and forcing a higher portion of the consumers' incomes to be allocated towards servicing debt.
Of course, the US will have to pay back the debt. It can do so in an honest way, by keeping inflation in check, or the expedient way, by inflating its way out of debt. Printing money is the perfect inflation creation mechanism: By increasing the money supply at a faster rate than economic growth, the US will simply lower its debt obligation by effectively transferring wealth from the debtors to itself.
However, inflation will have other unkind effects, one of which is the devaluation of the dollar against foreign currencies. Because US is a net importer, the devaluation of the dollar means that foreign goods - the kind that we consume voraciously - will become more expensive. This erodes from the dollars purchasing power and will make the average consumer poorer.
At some point, inflation will have to be brought in check and some realistic portion of the debt will have to be paid back. This will mean a further elevation of interest rates - and taxes, both of which again put pressure on the consumer.
So, the outlook for the consumer is grim. However, this outlook is far less grim than the alternative where the financial crisis and economic downturn viscous circle would completely collapse the world economy and create a long-term, worldwide depression.
There is no easy way out and the consumer will have long-term pain. The path that we are currently on seems to be the least painful path, but keep in mind that we made a key assumption: The Obama administration will spend the money as effectively as possible. The wrong policies, or poor implementation of the right policies, will drag us down even further.
