Over the weekend I’ve had a nagging question stuck in my head as I’ve begun to ponder a few questions and potential outcomes after reading a post by a fellow poster on the CB forums: dchoi (Donald). In the past I’ve taken his comments as highly reputable since his current career, experience and knowledge indicate that he has a strong understanding of how financial institutions operate on their own and with others within the financial system.
The posts I’m referring to are from April 18th & 19th where he provides an opinion on the US fiscal stimulus plan where cheques ($900) will be sent out in the coming months to US residents in the hopes of easing the current financial strain on the population caused by a US recession and failing housing market. While some citizens won’t experience hardships as severe as many in the past two years; others are being smothered by massive personal debts, job losses, pending foreclosures and bankruptcy.
As Donald asks the question: If you are the average American and have a job (but might lose it shortly), own a house with a declining value (your home equity is vanishing), banks refuse to lend you more money, gas prices are skyrocketing, food costs are rising…what might you do with your cheque?
A.) Spend it: Buy a big screen TV, down payment for a new car or new bedroom set
B.) Save it: Emergency fund, pay off last month’s mortgage payment or future moving costs
C.) Invest it: Make that money work for me
The consequences of the majority of the population, already struggling to control their debts, choosing either B & C will may well be the difference between a swift and mild recession to a long and painful recession. The governments’ intentions are clearly valid: $150B is a lot of money and meaningful is used by consumers on consumption. But the problem is just that…it only helps if used. A large segment of consumers more concerned with crushing debts, foreclosure on their home, rising costs or potential job losses are likely to not use those cheques for anything other than their own personal necessities.
I won’t summarize his thoughts on LIBOR rates (inter-bank lending) but if you take the time to read many of his posts you may find them informative and useful in gaining a better understanding of what is going on behind closed doors.
Whether accurately realistic or not, these thoughts encourage discussion on the topic of what impact this stimulus plan may have on the US economy. The intentions are well intended, but this time the consumer may be focused on more pressing needs than large discretionary purchases that have helped in the past.