Cash not just against the crisis: where American cash checks end up

Wednesday March 17th 2021

Cash not only against the crisis
Where Americans' cash checks end up

By Diana Dittmer

The Biden government distributes a new round of free money. Millions of US citizens will soon receive a check for $ 1,400. The money is supposed to kickstart the economy. That is not unproblematic. How it is output is not specified. Not only the economy is lubricated.

Millions of Americans will find most welcome mail in their mailboxes in the near future: The United States' federal tax authority, the IRS (Internal Revenue Service), has been bagging checks for $ 1,400 for US citizens on a large scale since last Saturday. Observers estimate that the money will be in the bank accounts on Wednesday or Thursday. Where it flows afterwards is up to you. The government did not specify that.

The checks are already the third round of free money that Washington is distributing to citizens during the Corona crisis. At 1.9 trillion US dollars, it is half the size of the German gross domestic product. The Americans are not messing about, they are stuck in the crisis. Last April, over 30 million households were receiving $ 1,200 per person and this January $ 600 per person. The current checks are part of the coronavirus relief package under the government of Joe Biden. All US parcels in the Corona crisis together now have a volume of around five trillion dollars.

Although the world's largest economy got through the pandemic relatively lightly and it has "only" shrunk by 3.3 percent, the government is knocking out the money with full hands. In addition to direct payments for taxpayers – below an annual income limit – the package includes additional help for families, including child benefit. A family of four can look forward to up to $ 7,000 extra this year. In addition, there is an increased unemployment benefit from the federal government until autumn. The government's plan: The Americans should go shopping with the generous donation, put the money into circulation and thus lubricate the economy.

Biden's trillion bet

US economic output is still 70 percent dependent on private consumption. To this extent, paying off consumer incentives to support the economy seems logical. However, the lavish monetary gifts are not entirely unproblematic. Biden's trillion package will give the economy a boost, but the stimulus should also drive inflation. How much is controversial among experts. The US Federal Reserve is so far only assuming a brief effect.

What people are going to do with their checks now is the trillion dollar question. Are the Americans spending the money? And if so, how quickly and how much of it? The pandemic is currently blocking major consumer spending. So the big buying frenzy should be canceled for now. So will the Americans put the money on the high edge for now? Or does it serve as "play money" for something completely different? The experience with the last stimulus checks has shown that a lot is possible.

According to the U.S. Department of Commerce, household savings in the pandemic grew to $ 3.9 trillion, down from $ 1.4 trillion in February 2020. Economists expect the biggest wave of consumption of all time to break out when the lockdown in the major countries of this world is lifted for the first time and the corona trillions that have been saved are loosened. A lot of money should then flow into the restaurants, travel, event and culture industries. The consumer goods manufacturers should then also benefit from this warm rain of money. So exactly what the Biden government intends to do. But even professionals cannot quantify exactly how high this sum will be. Surveys in the USA speak of a share of 30 to 40 percent of the aid money.

Lots of play money for the stock market

Based on previous experience and in view of the ongoing stock market hype, observers agree that a large part of the money will end up in the stock market. An estimated three billion dollars from Biden's billion dollar aid package should flow into this, writes the Financial Times, citing Vanda Research, a data analyst who specializes in the behavior of amateur investors. This is therefore of a similar order of magnitude as the money that is expected to flow into consumption.

"There is a group that is apparently taking advantage of this incentive and is not investing it in the economy," the paper quotes senior portfolio manager Andrew Slimmon at Morgan Stanley Investment Management. "They invest it in the financial markets." Already after the first two free money rounds, the number of new stock portfolios and the inflow of new money on the stock market had risen significantly. The Robinhood trading platform provides an indication of what is going to happen. In its latest newsletter it is already addressing shareholders who are just about to fill up with fresh money.

"The stimulus has landed," headlines the online broker. Experience probably proves him right. The stock exchanges are constantly celebrating records during the crisis: The S&P 500 has gained 75 percent in the past eleven months, the Nasdaq-100 even 90 percent. After the second check in December, Robinhood's customer deposits rose seven percent. Young investors under the age of 34 apparently played an important role in this, as a survey by Deutsche Bank shows. At the time, two-thirds of them said they used their stimulus checks to buy stocks. For those over 55, it was less than a quarter. Wall Street traders are likely to rub their hands. What is certain is that the monetary stimuli that are still being paid out will now play a role: for consumption, for the stock market and, if necessary, for the central bank as well.