By Aman Jain. Originally published at ValueWalk.
Every now and then we see an argument in favor of another stimulus package. Americans are also expressing their frustration on social media platforms on how badly they need another stimulus check. One economist, however, believes that another round of coronavirus stimulus checks could eventually cost Americans and the economy down the line.
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How will coronavirus stimulus checks cost Americans?
Sahil Bloom, the financial educator of Altamont Capital Partners, told CNBC that the stimulus efforts will trigger a domino effect that would result in increased inflation. Bloom noted that the rising federal budget deficit would lead to increased inflation, and this in turn, would eventually cost Americans down the line.
Historically, large deficits have resulted in increased inflation, meaning the buying power of the dollar comes down. However, he noted that the opposite could be bad for Americans as well. Bloom says this is how Americans would end up “paying back” for the coronavirus stimulus checks they get.
One primary objective why Congress passed the stimulus checks was to suppress the fears of “deflation,” which is the drop in the value of money because people are spending less. Bloom, in fact, believes that the U.S. government wants some inflation, of about 2%, in the economy at all times. However, inflation becomes an issue for the economy if it rises more than this.
Since the dollar is the “global reserve currency,” the U.S. is unlikely to witness a situation of hyper-inflation. But, the threat of “stagflation” is not of the question. Stagflation is a rare economic phenomenon where inflation goes up and employment goes down. The U.S witnessed the same phenomenon during the economic crash of the 1970s, when rising oil prices completely derailed the economy.
Deficit rising, but relief package needed
The U.S. federal deficit is expected to hit a record high of $3.3 trillion this year. And, the deficit could rise even higher if Congress approves another relief package. A report from the Congressional Budget Office, earlier this month, noted that the size of the debt is expected to grow bigger than the size of the U.S. economy.
The last time this happened was during World War II, when there was massive spending on federal programs to boost the economy.
“It was a massive rise in borrowing and quite shocking, but incredibly effective,” former CBO chief economist Wendy Edelberg, told The WSJ. “On the flip side, this is exactly why we, as a country, want to have room to increase borrowing during times of emergency.”
Bloom may be saying that coronavirus stimulus checks could eventually cost more for Americans and the economy in the long run, but several experts believe another stimulus package is needed for the economy to recover right now.
Greg Jensen, the co-CIO of hedge fund giant Bridgewater Associates, told CNBC earlier this month that the U.S. economy needs a stimulus package between $1.3 trillion and $1.7 trillion to sustain the recovery.
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