Ronald Reagan warned us to fear the words, “I’m from the government and I’m here to help.” With congress obsessed over trillion-dollar stimulus packages to “help” struggling Americans, let me share an analogy from college football. Imagine for a moment that the Rose Bowl game will be played this year with 100,000 fans in attendance. Before kickoff, it is announced that $10 in cash for snacks will be given to every fan. As the money is passed around the crowds rush to the various snack shack locations to snatch up hotdogs, sodas and treats.
Who really benefits from this giveaway? The fans would be happy with their free snacks, but the small amount has very little lasting value to any of them. So, who really benefits? Though only $10 per person, the total giveaway amounts to $1,000,000, almost all of which will find its way into the pockets of the snack shack owners.
Now consider a national stimulus bill that hands out a couple thousand dollars to most households. Those who receive it can buy food, some luxuries or pay a few payments, but would it really make a lasting difference? For most people the answer would be no. So, who would really benefit? Though a couple thousand dollars won’t change the lives of most families, as a collective trillion dollars works its way into the pockets of relatively few national businesses, you can begin to see one reason why Wall Street keeps hitting record highs during a period of economic weakness. They are the snack shack.
The downside of stimulus is that printing and distributing money does not add wealth to our economy. It merely transfers it. By printing additional dollars, it devalues the dollars already in existence. By giving people money to spend that wasn’t earned doing productive work, it tips the economic scales in favor of the “demand” side. That means there is more money but fewer things to buy because we are producing less, which pushes prices up. Both of these economic events, devaluing dollars and increasing inflation, tend to hurt the most vulnerable in the long term. Those are the same people the stimulus is supposed to be helping.
If I were cynical about government efforts to “help,” (I usually am), I would encourage people to take their stimulus checks and buy stock in the large companies that may eventually wind up with most of the stimulus money. This is essentially what Wall Street is doing because they know deficit spending mostly hurts those on fixed incomes and who keep their money in cash type savings accounts. Large businesses have the luxury of protecting themselves from inflation by raising their prices, as they are already doing.
With a trillion-dollar stimulus package the government may actually be here to help. But, pay attention to who it is they are helping the most. My advice to investors is, as long as government continues down this foolish path of out-of-control deficit spending, try to position yourself as the one who owns the snack shack.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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