- On 27 March the CARES Act was signed in the United States, the largest stimulus package in its history at the time, with more than two trillion dollars.
- It combined payments to families, loans to companies and aid to the sectors hardest hit.
- A rescue like this solves a problem today and raises others tomorrow: more public debt and, later on, inflation.
On 27 March 2020 the CARES Act was signed in the United States, the largest stimulus package in its history at the time, mobilising more than two trillion dollars. It included direct payments to families, loans to companies and support for the sectors most affected by the halt in activity. The figure exceeded any precedent and forced a rethink of what was possible in economic policy.
Although it was passed in Washington, the reach of the measure went far beyond the United States. Its scale set the tone of the global economic response and of what other countries could expect: governments prepared to spend on a grand scale to stop a health crisis from becoming a prolonged financial and employment crisis.
What the law contained
The CARES Act combined three kinds of support: direct payments to households to sustain consumption, loans to companies so that a lack of liquidity would not push them into bankruptcy, and aid to the hardest-hit sectors. Each answers a different problem: demand that collapses, cash that runs out and industries that, by their nature, cannot operate normally. Distinguishing between the three helps to understand why the same package can be decisive for one company and irrelevant for another.
A fiscal stimulus is extraordinary public spending aimed at halting a fall in activity. Unlike monetary policy, which acts on the price of money, fiscal policy puts money directly in the hands of households and companies. Its effect is faster and more visible, but it also commits the State’s finances for years. That is why stimulus packages of this scale are so debated: they bring immediate relief and create future obligations.
Fiscal and monetary policy together
The massive fiscal response, together with central banks’, changed the script of the crisis. When governments and central banks act at the same time, the effect is greater than when only one does: the first hands out money and the second keeps credit cheap. Many bankruptcies were thus avoided in the short term.
For companies and families, that combination meant a cushion that softened the fall in income while the shutdown lasted. But a cushion is not a final solution: it sustains the economy while activity is restored, and its usefulness depends on that activity recovering. Aid buys time, and the task of each company is to use it to adapt. Anyone who uses that time to review their business model, their costs and their dependence on a single customer or channel will be better placed when the aid is withdrawn.
The bill that comes later
That money does not come from nowhere: it is financed by public debt, and an economy with plenty of money in circulation and limited supply tends to see prices rise. They were two foreseeable consequences, though not immediate: more public debt and inflation later on. Both would shape 2022. That a consequence arrives late does not mean it will not arrive, and today’s decisions on financing, prices and savings should take it into account.
For anyone running a business or managing assets, the practical lesson is to look beyond the immediate relief. An environment of heavy public debt and rising prices affects the cost of borrowing, contracts with fixed prices and the purchasing power of savings. It is worth reviewing calmly, and with the adviser, how to be prepared for each scenario. In particular, it is worth asking what would happen to the company or the estate if interest rates rose or if the prices of supplies rose steadily.
Large rescue measures solve a problem today and raise others tomorrow.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
