Stimulus sounds like what an unlucky soul provides to a gentleman prior to a pornographic movie, so what is it doing in EVERY financial headline in the last 3 years?

Ok enough of this personal finance hoohah, you wanna be able to hang conversationally with those suave sons of bitches you see on TV with their ironed clothes and matching socks. Stimulus has been probably the biggest overarching news topic in the financial news (hell even the biggest in the mainstream news) since the meltdown of 2008 had government officials and investment bank CEOs collectively committing Hari Kari (I’ll come back to try and explain the financial crisis in a later post….possibly using hooker analogies).

So we’ll focus on the main type of stimulus that governments traditionally have available to them (ISBA: stimulus bullets). I was going to write more about other types of ‘mulus, but I don’t want people to have to break out their eyelid kickstands so I’ll come back to it in a later post and stay more general for now. But first a brief interlude to discuss how banks work:

- In their simplest form banks take in some dollarz as deposits and lend those deposits out to some fools. Ideally, banks want to lend out every penny they take in as deposits because they are making interest on it. Obviously this is not feasible, because people want to, you know, withdraw their money sometimes n stuff and so the bank needs to have some cash on hand to service these people (stop giggling). So let’s say a bank takes in 100 bones in deposits (that’s dollars for those of you unskilled in ebonics) and is required to keep 10% of that in reserve (ISBA: “required reserve ratio”, 10% is approximately the required reserve ratio in North America) so they lend out 90 bucks to people who then deposit that into another bank. Then that other bank now has 90 bucks in deposits (so 190 in total deposits between the two banks), they need to keep 10% (90 * 0.1 = 9) on hand so have 81 dollaz to lend out. So now there is (100 + 90 + 81 = $279) in deposits all from the original 100 dollars, and it goes on and on and on. With a reserve ratio of 10%, the amount of money sloshing around will end up being 10 times the amount that is physically there (1000 bucks in this case). Now as long as everyone trust that the banks are good for your deposits, everything works just merrily, but the second doubt creeps into a depositor’s head that the bank might not have your money…. Well watch the fuck out. Everyone runs to the bank clamoring for their money so that they can put it in their mattress. But each bank only has 10% of the money required…. and long story short the economy is replaced with spiders. Think of it like a blow up doll. The economy is the blow up doll, the banks are the blow..up..machine…thing, and the air is trust. So what do you get when the trust evaporates? A big flaccid economy that’s what.

• This type of rush to remove money from a bank is called a (ISBA: “Bank run”) and is almost always present to some degree in every giant market crash. The market crash of 1929 caused a number of smaller banks to fail and this trickle effect and the evaporation of trust lead to several widespread banking crises. After this, in the 30s, North American governments came up with several mechanisms to prevent runs on banks such as deposit insurance for everything under 100K. But, bank runs, like herpes, are vicious little bastards with staying power and can evolve. 2008 saw its own version of a bank run, which will be discussed in a later post.

Ok on to the stimulus:

- The most common stimulus bullet is lowering the rate at which the central bank of every country lends money short term (overnight) to the country’s major banks (ISBA: target overnight rate). This has the effect of lowering the rates that businesses and consumers alike can borrow money from their banks, so mortgages are easier/cheaper to get, personal lines of credit are less expensive, loans for businesses to finance expansion are less expensive, and credit flooooooowwwwwsssss. Sounds gnarly right? Well for a while it is, money is “cheap” to get for the bank, so they relax their risk tolerances cause hey if someone fucks up on this loan fuck it we got bajillions more and it’s not like this money cost us much anyways, so banks start lending to people who aren’t worthy of it annnnnndd…….super simplified version of mortgage crisis of 2008 anyone? The OTHER effect of this money multiplication effect from above is, as long time readers of this blog will recall, what does an increase in the supply of money do? Wild ass inflation.

• If you just woke up from a fear coma at the sight of numbers, just know that the risks of lowering the target overnight rate are that inflation will increase because the amount of money in the system increases and the easy access (ISBA: cheapness) of money could lead to a bunch of jamooks being approved for loans they can’t afford (note: that is not a racial term. Urban dictionary defines it as “A clumsy loser who is incapable of doing normal human tasks”, just wanted to free myself up to use it in future).
• But you can only cut rates to 0% right? So what if you REALLY sucked it hard and you need to go farther than essentially giving away free money?? Well that is the state that the US is in right now and it is called quantitative easing (ISBA: “QE”). In a super-nutty shell, QE is the government juicing up their account with money they made out of nothing and giving it directly to the banks to give them more to lend.
• BIIIIIG ISBA: The government using interest rates and QE to manipulate the amount of money in the economy is referred to as “monetary policy” as opposed to “fiscal policy” which will be discussed in a later post.

So stimulus is basically crack for the economy. It’s designed for when shit hits the fan to make people start spending again, to make banks start lending again, companies start hiring again, discourage that craaaazy notion that “saving” is good, and to generally “fix” the economy. But let me ask you this, has crack ever fixed anything long term? (Hint: no. See: the 80s). Crack gives you the ability to do backflips, befriend unicorns, and feel no pain for like 3 hours (note: that is my sheltered suburban idea of what crack doing is), but it certainly doesn’t empower you. You are more likely to wake up upside down against a wall mid somersault with your pants gone than in a responsible position. Even mainstream media likes to refer to stimulus as “the punchbowl” and uses the hangover analogy for when it is removed. Stimulus delays pain and tries to mask economic downturns with massive government spending to replace the lack of private sector and consumer spending. But the government can’t spend forever and when the crack party is over you are left with a buttload of government debt that needs to be paid off by….. taxpayers generally, through higher taxes down the road (like when your kids are all growned up) or inflation (see earlier post on the Weimar republic). But that’s another administrations problem right?

So now that I’m firmly seated on my high horse judging the work of people with MBAs and decades of experience in macroeconomics, let’s look at the alternative to stimulus. So shit hits the fan, the markets smell worse than a homeless person fart drifting through an onion, banks are freaking out and not wanting to lend to anyone, companies are laying people off left right and center, puppies are crying, and…. Well that’s it….. If the government doesn’t step in and do something about it then this is the reality. Unemployment will go up, households will cut their spending and save more, interest rates will go up because it’s riskier to lend to these new jobless consumers, and life will straight up suck… for a short period of time. Consumers and businesses, having cut spending to the bone start to have more cash, which makes them more creditworthy, which makes banks, who also have tons of cash sitting around (cause they haven’t been lending), more likely to lend, which allows businesses to expand and hire people and so on and so on. It’s the business cycle, and left to its own devices it will always return to a kind of middle point. Government policy is designed to smooooooth out the cycle and make the crashes less painful and the upswings less drastic (remember governments can raise interest rates too when things start getting too crazy). The thing is…. think about everything….yes, all of the things you know, somehow they all fit into the economy and some group of dorks at the government have to decide based on a bajillion indicators when to raise rates and lower rates and guess what? They fuck it up all the time and can actually end up making the swings wayyyyy worse.

There is no right or wrong answer when it comes to stimulus, whether it is better to just kick it old school like Dr. Dre and let the market run its course and deal with the political and social backlash of having people unemployed and poor, though for a relatively short period of time. Or is it better to manage the shit out of that shit and risk deferring all of today’s hardships onto our kids and, maybe more importantly to leaders, a future government who will have to deal with the political backlash. The Americans are deep into the manage the shit out of that shit camp right now and have racked up a truly ball shattering debt that no one really knows how they will pay off. Canada tried to say no to stimulus when Harper said “hey….we’re cool guys we already got some shit goin on don’t sweat it!” in December, 2008. The rest of the government promptly tried to form a coalition and topple him. Now Canada’s debt is mounting, but our economy has outperformed much of the rest of the world. Is this a divisive issue? Fuck. Yes. The moral of the story is: shit has to happen eventually, life financially can’t be rosy forever, but choosing suffering now over someone else suffering later is often a decision too damn hard for people only thinking in 4 or less year intervals.