Now that the President has recovered from COVID-19, political headlines are shifting back to what will be in the next Stimulus Package. Today we take a step back to look at why we need these funds in the first place, and where all the money is coming from.
And for those who noticed todays title: Yes, this newsletter believe in the Oxford Comma.
📰 In the Headlines
Translating some of this week's biggest stories
Translation: The stock market is doing well because technology companies keep making money
As uncertainly around COVID-19 keeps us sheltering in place, the technology that keeps us connected to the world becomes more valuable. As long as we are in lockdown, tech will remain one of the safest bets in the market.
Translation: The investors behind WeWork and Uber are creating a SPAC
SoftBank the reputation as the wildcard of the investing world. With their tendency to throw around huge sums of money with little regard for the consequences, we think their journey into the new world of SPAC’s is going to be quite the thrill ride.
🎧 Want to learn more about SPAC's? Listen to our recent podcast episode about this emerging investing trend.
Translation: Countries all over the world are coming together to find the best way to respond the the pandemic
This week, the International Monetary Fund and World Bank are meeting to discuss, what else, the global pandemic. Given that countries have taken radically different approaches in addressing the fallout from COVID-19, many are excited to see what comes out of this gathering of some of the worlds greatest economic minds.
💵 Mo money, mo problems
If you’re like me, seeing an additional $1200 in your bank account this past May was a very welcome surprise. But as the old adage goes, “Mo money, mo problems”, and the COVID-19 Stimulus Package's was no exception.
As Congress dives into negotiations for another round of stimulus funding, let's take a look at where they are getting the money, and how it might come back to bite us down the line.
Do we even need this?
Beyond helping fund our recent investments in WFH attire, your stimulus check played an important role in keeping the entire US economy on a healthy track.
In many ways, the economy like a big train, it takes a lot of force and time to slow it down or speed it back up. Events like a global pandemic and 13 million people losing their jobs are just the kind of thing that could completely knock us off the rails.
Like any large moving object, the more the economy slows down, the harder it will be to speed up again. Congress is hoping that putting an additional $3 trillion back into the engine of the economy, we will keep us chugging along smoothly.
How do we pay for it?
Congress may be the one passing this new stimulus package, but it's the U.S. Treasury that has to pay for it.
Usually, the Treasury uses the following two methods to pay for Congress's spending, but they're not going to work this time:
- 🐖 Dip into savings: The IRS is a department of the US Treasury, so part of they have access to all the funds raised by our tax dollars every year. But, given that the government already outspends our tax revenue by over $1 trillion every year, we doubt they’ll be withdrawing from that account.
- 🌳 Printing more money: The Treasury also controls the U.S. Mint, the department responsible for printing new money. They could just keep printing bills until we have what we need, but that could cause some serious inflation problems, not to mention the poor trees.
So if we’re not using taxes or just printing more bills, where is this money coming from?
🎩 The Fed’s Magic Trick
The Federal Reserve, aka “The Fed” for us cool kids 😎, serves as America's personal bank. The Fed does a lot of things, one of which is buy Federal Bonds, or very official and fancy IOU’s, from the US Treasury when they need a bit more cash.
This is where the magic happens; the Fed is buying these bonds from the Treasury without any money. Instead, they just type in a few more zero’s at the end of their bank account to make the math work.
Is this going to become a problem?
The Fed are the ones responsible for managing inflation and interest rates, so they will only lend out as much money as the economy can sustain.
The US is currently in debt for a total of $27 trillion. Most of that debt is in the form of bonds, which will eventually have to be paid back, but there is no immediate due date on that bill.
Ultimately, we will have to pay back this massive loan that Congress is taking out, either by cutting government spending, raising taxes or massively increasing how much our businesses make from other counties. But, there is no timeline on when that will need to happen, and most economists think is something we don't even need to think about with until this pandemic is far behind us.
Word of the day
(n.) An IOU that the government uses to raise money for their spending when taxes don't cover everything.
Typically, bonds are a great low-risk long term investment.
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