Wayne,
I wonder what is your take on Inflation Reduction Act , which if passed, would return massive chunk of money back into economy. Would not it be a bullish push for stocks ?
Notoriously attempting to subsidize anything reduces the price in the short term and increases the price in the long term. If we play it out... The government is the banker in monopoly. If the banker either gives every player 100 dollars or makes each hotel 100 dollars cheaper it allows more people to buy hotels. Now that everyone has the ability to buy a hotel they will. As more people have a hotel it makes it more expensive to move on the board. All prices go up.
If we truly want to support an industry or class of people we must regulate the maximum price or limit the cost to specific individuals without providing an injection of capital. This is a difficult or even impossible thing to do while maintaining a free market system. For example... the airline industry when it was regulated. We have had the pleasure in the US to offset our inflation with globalization and being the reserve currency. We are in a changing world, it will be harder to pass that on as competing payment systems arise. Governments will be forced to spend less and central banks will raise interest rates.
In short, governments spending money or reducing taxes is stimulative and inflationary. If we attempt to pass this along to high earners or businesses it will cause a deflation in assets. This is because wealthy people generally using their money to buy more assets. As more assets are purchased the inflation is translated only to assets and the money is removed from the CPI and can actually be deflationary. Give money to the general consumer, they buy consumables... those things get more expensive... inflation in CPI. This will push the Fed even harder and capital markets with it. One thing to keep in mind is the speed at which it will trickle through the economy. Monetary tightening is slower than spending. If the spending bill gets passed and efficiently gets distributed it will hit inflation in 3-6 months. If an electric car gets subsidized it lowers the cost, therefore, increasing the demand, as the demand pops the business will react by raising prices... more inflation =(
What the bill needs to be named is "We are attempting to redistribute capital and stimulate selective industries in order to grow them for the longer term success of the country, Inflation will be a good smoke screen for raising taxes after we spent too much bill". Demand destruction (recession, depression, reduction in population growth) or genuine growth (Internet boom, the industrial revolution, automation adoption, competitive advantage globalization) are the only things that fix inflation in the longer term. If they do succeed in higher taxes though, that can be extremely distructive to demand and the money supply. It starts with business and high earners... history repeats itself. We might be entering a new supercyle of taxation.
Remember the 40-50s when the US faced high inflation from soldiers coming home and dealling with super high deficits from the war?
It always starts with the "Wealthy" and ends with the middle class...
Just my thoughts about the mechanics. It's nice that the politicians are trying though. Higher taxes masquerading as stimulus bills will definitly kill demand and make the Feds job easier.
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