$1.9T Stimulus Package! Marking One Year Since The World Fell Apart.

This post was originally made on 3/15/21

Welcome to The Bloch,

Thanks for subscribing. The big news this week is the $1.9 Trillion stimulus bill that Biden signed into law yesterday. With just a few days to spare before the flood of evictions would come. It always seems to happen like that doesn’t it? Congress moves at one minute to midnight. Crisis management at its finest!

So the conventional wisdom is that the stimulus is totally necessary and that anyone who even questions this obvious fact is above their pay grade. And I am not going to try and say the stimulus is or isn’t necessary. What I will do is explore what it is that is actually happening, when these stimulus programs go into effect.

Essentially, there are two big ways for the government and the banking system to create the (previously paper and now mostly) electronic bank money that we have been using for the last 50 years.

1. Fiscal policy is the government’s budget. The government can run a surplus, which means collecting more tax revenue than the government spends. This practically never happens. Most years the government runs a deficit which means it spends more than it receives in tax revenue.
2. Monetary Policy is the policy of the Federal Reserve (basically the national bank of the US government, run by the banking system, claiming to be independent). The Federal Reserve can enact a tight monetary policy, which means keeping interest rates high and rewarding savings. This also practically never happens. Most years (at least in my lifetime) the Federal Reserve has enacted a loose monetary policy, which means keeping interest rates low and rewarding those who take on debt to make investments. It discourages savings.

Let me give you an example. If I can get a loan at 5% interest, and then I can invest the money and get more than 6% return, it makes sense to do so. It especially makes sense to do so when I make a measly <1% by keeping money in savings. This is what is like today.

In a tight money environment, maybe I can still get the loan at 5%, but it is probably higher, call it 8%. This means companies can’t afford to take out as many loans to invest now to pay back later because it costs more to pay back later than it would have otherwise. So now, in addition to companies not being able to grow as fast, people are more incentivized to save and make a higher than 1% return with low-risk savings.

So the $1.9 Trillion stimulus means: in Fiscal terms, the government is going to run a bigger deficit to pay for all of the extra spending. In Monetary Terms, the Federal Reserve is working to keep interest rates at all-time historic lows, in order to keep the our-of-control growing debt pile of the US government from getting even more out of control. I mean, Imagine if we had to pay back our over $28,000,000,000,000 in debt at like 10% interest. Funny to even think about.

The result of all of this is there is less confidence in the US government and the Federal Reserve than ever before. Therefore fewer people want to buy the US government debt, and the yields on those 10Y and 30Y US Treasury Bonds have to go up to create more demand and get more people to sell stocks and buy government bonds. And that is the story of stock market correction over the last two weeks. Pricing in the stimulus package.

People are also fearful of inflation. And when they think about inflation, typically they are thinking about the cost of food and clothes and such, so the government gets away with telling us that inflation is very low. I don’t know about you, but if you’ve checked the prices of education, housing, and transportation, those things have gone way up. To understand the real cost of inflation I like to refer to the Chapwood Index which discusses the problems with the CPI and does their own calculation. According to them, the 5 Year average inflation rate is over 10% in a bunch of large cities in the USA.

Inflation is another way to say devaluation of your money. The loss of purchasing power of your currency. Increased prices in goods and services. If you put Federal Reserve Notes (also known as US Dollars) under your mattress, they are losing 10% of their value every year, even though they still look the same. Keeping your money in a savings account in the bank is basically the same. Your dollars are dying.

This is why people turn to Bitcoin. People love to point out the skyrocketing Bitcoin, housing, and stock, prices as a bubble. But they don’t often think about the reverse, which is essentially an en masse exodus from fiat currencies. Look at this chart of the price of US dollars in terms of Bitcoin over the last 5 years.

For those who are just listening, the price of dollars in terms of Bitcoin is 0.00. It has pretty much flatlined there at this point. So, if you had 1 BTC 5 years ago it was worth $400. Today that Bitcoin’s value has multiplied over 100x since then. So in terms of Bitcoin, something that cost you one dollar 5 years ago now costs less than a penny.

The period of fiat electronic bank money is on the decline. The smart money has raced to hold assets like real estate, art, Bitcoin, gold, and more. Basically, anything the government can’t print at its free will.

So be happy with your $1400 stimulus check if you are getting one. At least the government is giving *some* of the printed money directly to the people who need it most. I mean, if you are going to devalue my life’s savings, at least give me a kiss and a nice little stimmy check to ease the pain first.

Until next time.

Bloch