Print Friendly, PDF & Email

Executive Summary

Since the pandemic took charge of the economy, several stimulus plans have been enacted by Congress.  Each round produced a short-term economic sugar boost before settling down to zero percent growth (see first graph).  The stimulus created more Federal debt.  Although Federal debt has been soaring since the 1980’s, the trajectory moved noticeably higher after the Financial Crisis of 2007-2009, and then went vertical (see second graph) in the pandemic.  Then on Monday, May 17, 2021, the U.S. Treasury reported:

Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above.”

These government payments resemble the beginning of UBI (Universal Basic Income).  As families become dependent upon these payments, there will be pressure to continue indefinitely.  And thus, it appears UBI is here…just under a different name.

Please proceed to The Details.

“Every form of addiction is bad, no matter whether the narcotic be alcohol, morphine or idealism.”
–Carl Gustav Jung

The Details

Since the pandemic took charge of the economy early last year, several stimulus plans have been enacted by Congress to counter-act the slowdown.  Notice in the chart of Core Retail Sales below, the rate of change in sales jumped as each round of stimulus funds were dispersed.  However, as can be seen, each round produced a short-term sugar boost before settling back down to zero percent growth.  I have stated in multiple newsletters that I believe perpetual stimulus is now in store to prop-up economic growth.

The two structural reasons for my hypothesis are the incredible levels of debt combined with an aging demographic bound to spend less.  The graph below compares the growth in Federal debt (red line) with growth in the economy (blue line).  Although Federal debt has been soaring since the 1980’s, the trajectory took a resounding vertical move after the Financial Crisis of 2007-2009.  This move was intensified with the arrival of the pandemic as the debt-to-GDP ratio hit 130%.

Tucked inside the American Rescue Plan passed in March of this year was a provision that contains many of the makings of UBI (Universal Basic Income).  UBI is simply a guaranteed income payment made by the Federal government to citizens to help cover basic living expenses.  With Federal debt already exceeding GDP and trillion-dollar deficits planned as far as the eye can see, there are no funds available for such a program.  To fund UBI, the Federal government would need to further accelerate its borrowing.  The government bonds issued to fund this program would be purchased by the Federal Reserve Bank by crediting the appropriate banks’ reserve accounts (as discussed two weeks ago).

The American Rescue Plan is a $1.9 trillion “stimulus” bill that was passed on a strictly partisan basis.  All but two Democrat Congressmen and no Republicans voted for this bill.  Among the provisions is one which expands the Child Tax Credit and makes it fully refundable.  The U.S. Treasury reported Monday, May 17, 2021,

“The U.S. Department of the Treasury and the Internal Revenue Service announced today that the first monthly payment of the expanded and newly-advanceable Child Tax Credit (CTC) from the American Rescue Plan will be made on July 15. Roughly 39 million households — covering 88 percent of children in the United States — are slated to begin receiving monthly payments without any further action required. […]

 Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above.”

The credit will begin to phase out for single filers earning over $75,000 and married filing jointly filers earning over $150,000.  President Biden announced he would like to see this benefit extended to 2025 and to make it permanently refundable.  This has all the signs of the beginning of UBI.  As families become dependent upon these payments, and as debt continues to grow, it is not far-fetched to assume there will be pressure to continue, and even expand these payments indefinitely.

And keep in mind, this is only one of many new stimulus disbursements or benefits provided to citizens.  As with any addiction, the more dependent an addict becomes, the more substance is desired.  The same will be true with government benefits.  A similar situation has already transpired with the extended pandemic unemployment benefits.  As many workers realized they could earn more by not working, available workers have become scarce, and many businesses struggle to find enough employees to run their operations.

The graph below highlights the dramatic difference in the year-over-year percentage change in Federal debt versus nominal GDP (before inflation).

Unfortunately, the path the U.S. is currently on will lead to further UBI and more government dependency.  This will lead to larger annual deficits and even higher Federal debt.  To fund such programs, the Fed will have to step up their bond purchases (QE) even further.  And although I wrote in last week’s missive that the recent inflation surge was likely transitory, perpetual, sizeable, government benefit payments could change the prognosis.

It appears that UBI, albeit under a different name, has arrived.

The S&P 500 Index closed at 4,174, down 1.4% for the week.  The yield on the 10-year Treasury Note rose to 1.64%.  Oil prices remained at $65 per barrel, and the national average price of gasoline according to AAA rose to $3.04 per gallon.


© 2021. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

Securities offered through First Heartland Capital, Inc., Member FINRA & SIPC. | Advisory Services offered through First Heartland Consultants, Inc. Prudent Financial is not affiliated with First Heartland Capital, Inc.