Saturday, November 15, 2008

2008 Economy Stimulus

By now, everyone who has a pulse has heard about the economic stimulus checks that Uncle Sam is sending to tax payers in order to help "stimulate" the economy. As news about the economy grows dimmer and dimmer everyday, the question arises is will this infusion of cash into the economy actually work in stimulating the economy?

The theory behind the stimulus plan is that taxpayers will spend the money on consumer goods. By spending money on consumer goods, businesses will then have cash for producing new products and services. This will create new jobs, which will provide more money for new spending, etc, etc. But will it work?

The American public is currently facing several economic issues that are negatively affecting their pocket books. We are currently going through a period of higher than normal price inflation, especially in basic goods such as food and energy. The US dollar is at it weakest point in decades, and does not look like it is going to recover anytime soon. We also have more personal debt than in any other time in history. All of these issues can reduce the positive effects the money from the economic stimulus plan will have on the economy.

Inflation is something that most people are familiar with. However, recently inflation has been growing at a rapid pace - not only in the U.S., but globally. Everyone is well aware that the prices of gas and food has increased dramatically lately. This is due primarily to higher demand for basic consumer products from outside the US - primarily China and India.

Another reason for rising costs in the U.S. is the weakening dollar. Since the U.S. has a service-oriented economy, we import most of our consumer goods. As the dollar grows weaker, the cost of these imported products becomes more expensive. These products will increase in cost even if the demand for them is less, and supplies are high. A good example of this is the cost of gasoline. Recently, gasoline supplies in the US have been at their highest amount in years. However, due to the weak dollar, both gas and oil are more expensive than anytime in history. If the dollar continues to weaken, the cost of imported goods will continue to rise. Part of the money from this stimulation plan will go to just paying for the higher costs in buying the same items we are already purchasing.

Lastly, consumer debt is at it highest point in history. People are struggling not only to pay for basic goods, but also make payments on credit cards and mortgages. Some of the money may well be used to pay down consumer debt, not create new spending.

So, will this plan work? Will the economy actually be stimulated by giving Americans a few hundred dollars in order to spend at their local shopping mall? Obviously, it depends on how the American public decides on what to spend the money it receives. But based on some of the other economic problems we are facing, this money may be just a drop in dry, dry bucket that has a very large hole in the bottom.