- On 14 January, president-elect Joe Biden presented the American Rescue Plan, a 1.9-trillion-dollar package.
- It included direct payments, unemployment aid and vaccination funds: public spending financed by debt to sustain demand.
- So much stimulus on an economy already recovering would feed the inflation of the following months; few foresaw it.
On 14 January 2021, president-elect Joe Biden presented the American Rescue Plan, a 1.9-trillion-dollar package. It included direct payments to households, support for those who had lost their jobs and funds to speed up vaccination. It was a new large fiscal stimulus, and its size placed it among the biggest responses of the era. In practical terms, it meant putting resources in the hands of households and the vaccination campaign at a moment of maximum urgency.
That the stimulus was announced before the new administration took office already said a lot about the urgency with which the situation was viewed. But the plan’s importance went beyond the United States: the world’s largest economy was injecting demand in the middle of a health crisis, and that decision would end up affecting prices, interest rates and currencies around the world.
What a fiscal stimulus is
A fiscal stimulus is additional public spending, normally financed by debt, to sustain demand when private consumption and investment fall. Direct transfers aim to help households keep up their spending, and unemployment benefits prevent job losses from translating immediately into a drop in consumption. The vaccination funds, for their part, aimed to speed up the way out of the health crisis, on which the reopening of activity ultimately depended.
The flip side is that, when demand grows faster than the capacity to produce, prices tend to rise. In an economy that was already recovering, adding such a large boost could overheat it. It is not an error of intent but a known side effect of this kind of policy, whose scale is hard to measure in advance.
What happens there reaches here
Many of the effects of that plan would be seen in the following months. So much stimulus would feed inflation, and few anticipated it at the time; many would pay for it in 2022. For a European company the channel was not direct, but it was real: the path of interest rates, energy and raw-material prices and the value of currencies depend largely on what Washington decides. When the US economy grows strongly and prices rise, the effect spreads through financial markets and international trade.
For families, those same channels translate into the cost of a mortgage, the price of the weekly shop or the return on savings. The point is not to predict every move, but to understand that the economic policy decisions of the major powers end up reaching household accounts. Anyone with a variable-rate mortgage or planning to refinance debt is especially sensitive to this kind of change.
What assumptions your plan makes
It is worth asking what assumptions one’s own financial plans take for granted. If a company or a family assumes that the environment will stay the same, any change in inflation or rates will hit hard. Reviewing variable-rate debt, price-adjustment clauses in contracts and cash buffers is a practical way to prepare.
There is no need to guess the most likely scenario. What is useful is to check how the plan would behave if prices rose more than expected or credit became more expensive, and to discuss it with an adviser before it happens. Well-intentioned policies also have side effects. A periodic review, for example once a year, makes it possible to adjust the plan without having to react in a hurry.
A solid plan allows for scenarios other than the most likely one.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
