[Global Focus ①] Biden's '2155 Trillion Won Gamble' Has Begun

Trump's Late Last Year $900 Billion Included, Equivalent to 13% of US GDP
7% Economic Growth Forecast This Year, but Concerns Over Currency Depreciation and Soaring Inflation Remain

[Image source=Yonhap News]

[Asia Economy Reporter Park Byung-hee] ‘Biden’s big gamble’. This is the title of the main article in the recent issue of the British economic weekly The Economist, covering U.S. President Joe Biden’s $1.9 trillion (approximately 2,155 trillion KRW) stimulus package.

On the 12th (local time), President Biden signed the $1.9 trillion stimulus bill. This came just three months after former President Donald Trump signed a $900 billion stimulus bill in December last year. The total stimulus support approved by the two presidents amounts to $2.8 trillion, equivalent to about 13% of the U.S. Gross Domestic Product (GDP).

With such a large-scale stimulus, there are forecasts that the U.S. economic growth rate could exceed 7% this year. However, the U.S. government will inevitably face an increased fiscal deficit burden. Concerns are also growing that the massive issuance of dollars will lead to a decline in currency value and a sharp rise in inflation.

The impact of this stimulus package does not stop at the U.S. The Economist likely used the term “gamble” because of the potentially significant adverse effects it could have on the global economy.

◆ Lessons learned by ‘Vice President Biden’ = The passage of this stimulus package marks President Biden’s first political achievement. Even before taking office, he advocated for a large-scale stimulus to respond to COVID-19 and successfully passed the stimulus bill according to his intentions.

Analysts suggest that Biden pushed for the large stimulus package based on his experience as vice president in 2009. The stimulus bill signed by then-President Barack Obama on February 17, 2009, was $787 billion. About a week after Obama took office, the House passed a stimulus bill worth $819 billion, but there was backlash that the stimulus was too large, and after some difficulties, the amount was finalized at $787 billion. It has been analyzed that the relatively small size of the stimulus delayed the U.S. economic recovery, and that Vice President Biden took that experience as a lesson.

However, critics argue that the claim that the 2009 stimulus was too small does not justify the need for a larger stimulus this time. The economic downturn caused by COVID-19 differs in nature from the 2008 recession triggered by mortgage defaults, so the response methods should differ accordingly.

◆ Money flowing into stocks and Bitcoin = The direct cause of the 2008 global financial crisis was reckless lending to low-credit borrowers. Housing prices, which seemed destined only to rise, plummeted, leaving many in debt and causing prolonged weak demand.

In contrast, the risk of prolonged weak demand is not high in the current COVID-19 situation. Once the crisis subsides, consumption could surge explosively. This was already demonstrated by U.S. retail sales data in January. With the stimulus bill approved in December last year, Americans received $600 per person from the government. Subsequently, January retail sales surged 5.3% month-on-month, far exceeding the 1.1% analyst forecast compiled by Bloomberg.

In this context, President Biden has added up to $1,400 more into the pockets of the public. About 85% of U.S. households are eligible for cash payments. Since payments are also made to adult children, a family of four could receive up to $5,600 (approximately 6.36 million KRW). Including unemployment benefits and various tax credits, household support could exceed $30,000, according to some analyses.

A significant portion of this support money is expected to flow into stocks. According to a recent survey by Deutsche Bank of 430 U.S. individual investors, half of respondents aged 25-34 plan to invest 50% of their received cash into stocks.

Much of the support money distributed last year has already gone more into savings and asset investments than consumption, exacerbating asset bubbles and income inequality.

According to a report released by the U.S. Federal Reserve (Fed) on the 11th, U.S. household net worth reached a record high of $130.2 trillion at the end of the fourth quarter last year. It increased by $6.9 trillion (5.6%) in just the fourth quarter. Net savings in 2020 reached $285 billion, double the previous record set in 20018.

Bloomberg noted, “These figures clearly show the imbalance in economic recovery,” adding, “Savings have increased significantly since the pandemic, and many Americans have bought homes or stocks.” The recent surge in Bitcoin prices is also widely analyzed as a result of massive liquidity.

◆ "Inflation could exceed 4%" = Supporters of the stimulus package, including U.S. Treasury Secretary Janet Yellen, do not deny the possibility of inflation. However, they argue it will be short-term and controllable. Fed Chair Jerome Powell emphasizes that restoring employment is more important than inflation right now and maintains an accommodative monetary policy.

In contrast, Lawrence Larry Summers, Harvard University professor and former U.S. Treasury Secretary, warns that the massive funds released during the economic recovery phase will increase inflationary pressures. Jeffrey Gundlach, CEO of DoubleLine Capital, known as the “Bond King,” also predicted, “The U.S. Consumer Price Index (CPI) could rise more than 3% this summer,” and “At some point, it could exceed 4%.”

The rapid increase in the U.S. fiscal deficit is also a source of concern. The Congressional Budget Office (CBO) estimates that Biden’s stimulus bill will increase the fiscal deficit by $1.16 trillion in the current fiscal year (October 2020 to September 2021) and add a $528.5 billion burden in the next fiscal year. The fiscal deficit has already exceeded $1 trillion in the current fiscal year.

The increase in the U.S. fiscal deficit could also affect the status of the dollar. The fact that Bitcoin prices have repeatedly hit record highs this year is analyzed as reflecting the diminished status of the dollar as a safe asset.

This content was produced with the assistance of AI translation services.