The Covid Economy (How Today’s Stimulus Will Destroy Tomorrow’s Society )
The Covid-19 pandemic has turned out to be a global shock unlike any other, causing simultaneous supply and demand disturbances in an integrated global economy. Infections have decreased labor supply and efficiency, while lockdowns, company closures, limited working time, and social distancing have disrupted supply.
Layoffs and income losses that have resulted from morbidity, unemployment, and quarantines and worsening economic prospects minimize household consumption and firm expenditure.
The extreme uncertainty about the pandemic's course, length, severity, and effect could set off a vicious cycle of low business and consumer confidence and tight financial conditions, resulting in job losses and reduction in investment.
The critical challenges for any empirical economic study of Covid-19 are identifying this unprecedented shock, accounting for its non-linear impact, considering cross-country spillovers, and quantifying forecast uncertainty, given the unprecedented nature of the pandemic.
What is Economic Stimulus?
Economic stimulus refers to when the government uses tailored, expansionary monetary or fiscal policy based on Keynesian economic ideas to stimulate private sector economic activity.
The term “economic stimulus” is derived from a biological analogy of stimulus and reaction, of using government policy to evoke a response from the private sector economy.
During recessions, economic stimulus is often used. Lowering interest rates, quantitative easing, and increasing government spending are common policy instruments used to enact economic stimulus.
An economic stimulus is expected to steer government deficit spending, lower interest rates, tax cuts, or new credit development toward particular main sectors of the economy. This aims at taking advantage of powerful multiplier effects that will indirectly boost private sector consumption and investment spending, rather than monetary and fiscal policy to replace private sector spending.
Fiscal stimulus is distinct from the more generalized monetary and fiscal policy in that it is a more focused and cautious approach to policy. It refers to government policies that minimize taxes or restrictions while still increasing government spending to stimulate economic activity. On the other hand, monetary stimulus refers to central bank acts such as interest rate cuts or market purchases of securities to make borrowing and investing simpler or cheaper. A stimulus package is a well-coordinated set of fiscal and monetary policies by a government to boost a sagging economy.
According to the hypothesis, increased private sector investment would then lift the economy out of recession. Hyperinflation, government defaults, or the (ostensibly unintentional) nationalization of business are all possible threats. Stimulus deficit spending through stimulating private-sector growth could allegedly also pay for itself through higher tax revenues due to faster growth.
During the course of a normal business cycle, governments use various instruments to try to control the rate and composition of economic growth. To stimulate development, central governments, including the US federal government, use fiscal and monetary policy tools. Likewise, state and local governments may participate in projects or adopt policies that encourage private sector investment.
A Normal Business Cycle
In a typical business cycle that would lead to a healthy economy, small-scale producers use available resources and manual labor to produce goods and services. Most times, they end up producing more than they can consume, and they sell this excessive production which enables them to save purchasing power.
They then reinvest capital in their businesses to make themselves and their businesses more productive by acquiring more advanced tools and machines to enable them to do the work much faster and more efficiently. This results in more production and consequently growth of the economy.
Eventually, some producers become so productive that they specialize in a particular product instead of using the little they have to produce various goods. With different people specializing in different areas, the society becomes self-sufficient as each sector can provide for the rest of the community. Therefore, members don't have to produce everything. They can buy what they don't produce from the surplus that other producers generate out of their capital investment.
Society consequently gets richer and richer as its productivity increases regardless of the currency units circulating within the economy. This is because what determines a society's wealth is the number of goods and services it can produce efficiently instead of the amount of circulating currency units.
Government Stimulus Economy
A stimulus Economy refers to a situation where the country's economy is built on government spending. When the government notes a problem in society, it spends with intent to make the situation better.
Local producers receive money from the government to enable them to produce more goods and services. However, this is not the case, and the end goal is not met because the attitude of the producer changes since they don't have to produce as many goods to get the same amount of purchasing power.
A lot of people are rooted in the false belief that the amount of currency units an individual or a society at large has is a measurement of wealth. When specialized producers produce less of what they used to produce, other producers in society begin to produce that good themselves, which leads to them reducing the amount of time they spend producing the good or service they have specialized in.
Superficially, it may seem like government stimulus is benefiting the society, but when you have a deeper look at it, government expenditure to boost the economy only ends up as ‘free money to a few producers.
The result of this is that the producers are incentivized to produce fewer goods and services, making society poorer in the long run.
To what extent is the government distorting the economy?
In 2020, incomes increased on average, but unemployment spiked up to 15%. With people staying at home and businesses closed, productivity decreased by a great margin. The Covid economy has led to a rise of government expenditure in relation to the GDP from 40 % to 57%. Over 4 trillion currency units were released into the economy.
The trade deficit has increased due to low productivity, and the government has to import goods from foreigners who are willing and able to produce those goods. This has led to foreigners becoming richer while the country becomes poorer due to producing fewer goods and services.
The road to Serfdom
The Stimulus economy created by the government is a form of socialism with all the right intentions. Still, it instead leads to more government power and control and puts the citizens on a path of totalitarianism.
With the economy being built more and more on government sending, it creates a dependency on stimulus. 57% of Gross Domestic Product in the USA is currently coming from government expenditure, meaning that the country is getting less and less productive.
The more addicted the economy is to monetary borrowing and economic stimulus, the less likely the government, can withdraw. And if a government can't stop all the stimulus spending even after it has led to inflation, it will increase its control over the banking system.
In the past, due to the pandemic, commercial banking systems created additional money supply in the real economy by issuing new loans. In an effort to save the economy, the government is going to restrict money creation from the commercial banking sector. This is why bank shareowners are currently selling their shares.
When there is so much debt in the system, the FED comes in and institutes yield curve control. This refers to the process of ensuring interest rates in the long end of the curve don't get above a certain level. This price-fixing and putting on price controls with the price of money itself greatly distorts the economy.
If inflation continues to get out of hand even after the government takes all these measures, then they will institute outright price controls on goods and services. This then leads to a Modern Monetary Theory where the FED and government treasury merge their balance sheets. This puts the president in charge of the printing reserve.
The government then gets to determine who gets credit and who doesn’t. It would result in a state where commercial banks won’t have the authority to lend you cash, but rather you’d have to seek the government.
As the government and the planning committee get more power, it attracts people who desire to have control over other people into the government.
The significant risk that this presents is the possibility of a dictatorship rule. Every percentage point that the government increases its spending with relation to the GDP, the greater the probability that the next ruler will be a dictator who will take the entire country and put it under a state of totalitarianism.
Low produce, a developing country, and a dictatorial leader await at the end of the road to serfdom, all brought about by economic stimulus.