As congress debates the finer details of the stimulus package on the heels of the Federal Reserve announcing several varieties of quantitative easing, one might wonder what is the difference between the two and how it will affect the average person?
The two are similar in the fact that both require money to be printed up, or created, out of thin air. As the money supply expands by several trillion dollars at a fast rate, prices can be expected to increase rapidly as the economy stalls and less products are available for sale. Over the last decade the money supply, through the ever expanding debt, has increased. However, during this time foreign countries have continuously exported cheap products to the United States in exchange for U.S. dollars and other forms of debt obligations nominated in dollars. This has prevented large inflation amounts as we, as a country, have essentially exported our inflation to the foreign countries – particularly China and other southeast Asian countries – while these countries have exported real products to us.
With the outbreak causing global production slowdown, and in some instance a complete stall, fewer and fewer products will be coming to the U.S. at a time that there will be more and more dollars circulating due to the QE program and eventually the stimulus program. The new money (in reality currency) will bid up the fewer products available causing sudden and violent inflation and making life more difficult for the average person. The stimulus might provide you with a $2,000 check, however that $2,000 in time might only buy what $500 can buy today, and it could get worse than that.
In simple terms, the Federal Reserve QE programs will create new U.S. dollars to buy up treasuries so the government can still operate, mortgage back securities so that the banks don’t go under, and possibly stocks and other assets in order to prop up markets. This new currency will eventually hit main street flooding money into people’s pockets competing for a decreased amount of products.
The stimulus package being debated will likely have the U.S. Treasury department send money directly to citizens. How will they get this money? They will sell Treasuries to the Federal Reserve who will buy the treasuries with currency created out of thin air; similar to the QE programs. And just like the eventual outcome of the QE program, the currency created through the stimulus package will just give people more ammunition to go after the same limited amount of products, including food, medicine, toilet paper, clothes, and all other nondurable goods.
In the end, all of the discussion and cheering over stimulus packages and “free money” will result in higher prices and a lower living standard. It is easy to forget during peace time that money is not really what people desire, but rather the things that money can buy. With the economy stalled, the products that people want to buy will slowly disappear, and those that remain will become more and more expensive.