The Economic Stimulus Plan

As you have likely heard by now, our federal government isputting together a plan to help the United States stave off arecession.  Right now, this plan consistsof a "tax rebate" for all taxpayers.  Intheory, if people have extra money in their hands, they will spend it and givethe economy a boost.  Unmarried peoplewill get $600, married couples will get $1200, and there will be a $300 rebatefor each child in the household.  This isall very sweet.  However, I think thereis a bit of a problem. 

When President Bush sent out everyone's "tax rebate" in 2001to help stave off a coming recession, there was a budget surplus.  In other words, there actually was extramoney in the bank to pass out to everyone. Today, the UnitedStates has a huge budget deficit.  The country is borrowing money in order tofunction.  So, the tax rebate that wouldbe handed out this time is money that doesn't exist.  In order to give this money out, thegovernment will borrow more money.

The USfunds its debt in a few ways.  One isborrowing from investors in the form of bonds, T-bills, etc.  Another way is borrowing from Social Securityand Medicare (also in the form of T-bills). That covers about half of the 9.2 trillion (that's 9,200,000,000,000)dollar debt we have right now.  The otherhalf is borrowed from other countries.  Thesedays, most of this portion of the USdebt has been financed by Japanand China. 

The UScurrently owes Chinaover 350 billion dollars.  Additionally, China currentlyowns over one trillion US dollars.  China's pegsits currency's value to the US dollar and owning that huge mass of US dollarshelps it to control the value of the dollar and therefore the value of its owncurrency.  This helps China keep the value of its currencyartificially low in order to make trading with China attractive to othercountries. 

So, the United States,in order to avoid a recession, is planning to borrow money from China so thatAmericans will spend the money to help the economy.  When Americans received their "tax rebate" in2001, the number one item purchased with that money was clothing.  How many clothing factories are there in the United States?  I'm guessing somewhere around zero.  Much clothing, and really, many (possiblymost) of the goods found in Wal-Mart and such, are imported from China.  So our government is going to borrow moneyfrom Chinaso we can buy Chinese goods and that is supposed to stimulate the Americaneconomy.  It seems the only Americancompanies that will benefit from this plan are Wal-Mart, Target, Sears, etc.because they are the middle man between China and the American consumer.

Assuming this plan actually becomes reality, I think thebest thing to do is to either use it to pay down some of your personal debt orinvest it in either a retirement plan or your kids' college fund.  Paying down debt will pay for things youalready bought in order to stimulate the economy.  Investing the money in a retirement plan orcollege fund will put money into the economy directly though the stock marketand will benefit your personal economy later on.  If you are really that concerned about theAmerican economy, buy into a fund that invests only in American companies.

I am married and I have two kids, so my rebate would be 1800dollars.  That number is seductivelysimilar to the price of the plasma TV that was advertised in yesterday'snewspaper.  However, I think our next TVwill be a 300 dollar junker and I will put my rebate to better use in the stockmarket.  If the Ronald Reagan/George BushSr. years are any indication, we'll be paying down George Bush's debt well intomy kids' high school years.  They'regoing to need that college fund.