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NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you wish to have specific advice for your situation please contact Polaris Financial Planning.

 

There has been a lot of talk about economic stimulus lately and I thought I would spend a little time on it here.  The GOP claims that it is being done to help Obama win the white house.  Well this is nothing new and I would argue that it is in the best interest of our economy.

Let us not forget that the GOP was all for economic stimulus when their guy was in the white house.

The Economic Stimulus Act of 2008….

….was signed into law on February 13, 2008 by President Bush with the support of both Democratic and Republican lawmakers.

There are two competing philosophies one involves cutting (austerity) and one involves spending (Keynesian economics).  You can see how well austerity is working in Europe! (via WSJ)

Spaniards are already reeling from a July round of cuts that eliminated Christmas bonus pay for public employees, lowered unemployment benefits and raised sales taxes, bringing new pain to wage earners hit by public-sector pay reductions two years ago.

“We cannot and will not accept more cuts,” said Angel Arriero, a 39-year-old information engineer at a government ministry, marching in Madrid’s late-summer heat Saturday with his wife and young daughter. He said his pay had dwindled by more 10% since Spain’s economy was plunged into crisis four years ago.

It is very hard to get people to spend more money to stimulate the economy when they have less.  Paul Krugman (my hero) says the problem in America is easy to fix.

American consumers and businesses, aren’t spending enough, and efforts to get them to open their wallets have gone nowhere. Krugman’s solution: The federal government needs to step in and spend. A lot. On debt relief for struggling homeowners; on infrastructure projects; on aid to states and localities; on safety-net programs. Call it “stimulus” if you like. Call it Keynesian economics, after the great economic thinker (and Krugman idol) John Maynard Keynes, who first championed the idea that government has an essential role in saving the free market from its own excesses.

The Federal Reserve – the fed is…

…the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.

The FED is taking more steps to help stimulate the economy.

The Federal Reserve’s new economic stimulus plan involves printing vast sums of money to help people buy homes, but over the next year the program could do more to boost the economy by lifting stock prices.

Printing more money can be bad and cause inflation.  However, if your economy is stagnant it could free up some money and encourage people to start spending and investing.  If the fed buys more bonds it will drive the price of bonds up the the yield goes down!  The effect is that bonds pay less money.  So, if you want better returns – you need to buy bonds.  This could give quite a boost to the market.

By giving an open-ended commitment to pour money into the market for mortgage-backed securities, the Fed will likely keep on supporting stocks and other asset classes by keeping returns low on MBS. Investors in search of yield will have more reason to buy equities and to lend money to companies.

Peter Hooper, an economist at Deutsche Bank in New York, thinks the Fed’s bond buying program will add at least a half a percentage point to gross domestic product over the next year, largely by boosting stock prices and making people feel more wealthy.

Lets hope it works.  People need jobs!