It’s déjà vu all over again. Looking back to the Great Recession of 2007-2009, governments around the world injected billions of dollars into their economies through massive stimulus measures aimed at keeping the global economy afloat. However, entering that period, the global economy was in much worse shape than it was entering this year, and the response was much slower. With the U.S. Federal Reserve (the “Fed”) leading the way in 2020, the world’s central banks acted swiftly and with significantly more stimulus money in combination with interest rates at an historically all-time low.
Congress was also quick to enact stimulus measures earlier this year. These included increased unemployment benefits, disaster recovery loans and payroll protection loans, many of which may be forgivable. These measures are largely designed to prop up economies and help businesses figure out how to operate during the COVID-19 crisis, or until a viable vaccine or therapies are introduced and we can get back to the world we once knew.
In the short term, these measures are helping individuals and businesses weather the storm and navigate today’s hazardous economic waters. Although, there have been complaints that some are taking advantage of the system and that more businesses could survive the rough waters without the money. Others are concerned that the temporary increase in unemployment benefits for individuals are a disincentive to return to the workforce, especially for those in lower paying jobs.
While it’s nearly impossible to get it right, these measures were intended to help ensure that those in need got the money they needed. However, monetary stimulus is not a long-term solution and has a limited impact.
Various countries around the world have taken similar actions to help their economies stay afloat. However, in doing so, governments assumed the potential risk of balance sheets being bloated well into the trillions of dollars, which eventually has to be repaid. One of the biggest fears is that, at some point, these governments will have to increase taxes to help pay down the debt, especially when interest rates go up and interest payments on these massive debts escalate beyond current cash flow.
While it is a slippery slope, like the United States, most governments throughout the world have signaled that they are more worried about today’s unprecedented circumstances and will deal with tomorrow when it comes.
Investment advice offered through Planned Financial Services, a Registered Investment Advisor.
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