Economic Recovery In Sight?

I woke up this morning to the news of a final vote by the Congress on the massive $790B stimulus plan spearheaded by the Obama Administration.

Think about it for a second, 790 billion dollars of our money that will be flushed into the this fragile economy. Remember what we learned in high school macroeconomics? Sitting through class digesting the WSJ, reading about Horatio Alger’s famous feel good story of “Ragged Dick”, and oh, somewhere along those lines, an equation M*V=P*Q.

M is the total money supply, V is the velocity of money, a.k.a how quickly cash is flowing through people and organizations through purchases. That product is equal to the P, the price level, times the quantity of goods produced. Combined together, the P*Q term is called the nominal total output.

The equation is very abstract, but in this case, it is perfect to illustrate my point. The last administration passed a $700Bn plan to save the actions of many of Wall. St.’s biggest firms, by lending them money to stay afloat, by extending credit lines to make sure they don’t go under. The Feds were more than happy to jumpstart the troubled economy by lowering inter bank lending rates to historic lows, they also committed up to one trillion dollars to buy bonds or assets backed by consumer loans. And now this, the 790 billions dollar plan that’s expected to pass, where roughly 286 billion is for tax cuts, 311 billion is for funding for different programs, and 193 billion in spending for benefit programs like unemployment, etc, etc.

Even if you’ve only skimmed through the above paragraph, you’ll see all the “billion”, “trillion” words jump out at you. All the money that the government is pumping into the economy is definitely going to agitate the economy and flush the market with the M, and that in turn, will speed up the rate at which money changes hands, the V. Once we have faster money circulation, a.k.a consumers buying more goods because they are getting their tax rebates from 2008 (Don’t wait till April, I just filed, and I am getting a boatload back on February 27th), they are getting another tax cut. Big companies can finally secure money to continue develop consumer products to sale to us. Companies like Caterpillar will be able to benefit from the stimulus plan, bid on billion dollar construction projects, and keep their assembly lines running strong. All that will drive up the P*Q term.

There is no doubt we are in a state of flux, but I think we are headed in the right direction of recovery. Who knows, maybe the economy will take off so fast that we might even worry about inflation a couple years down the road. For now, cash your checks, buy that Plasma TV, buy that shiny necklace, buy that company’s stock that you’ve been eyeing for and hoping it’ll dip even lower. It’s in our bones, as Americans, the most insatiable, reckless consumers of this world.