Last week, American president Joe Biden signed a $1.9 trillion (about R28 trillion) Covid relief package to help the US economy recover from the pandemic.
This was his first bid to get a massive piece of legislation over the line in the US house of representatives, winning the vote 219 against 210. None of the republicans voted in favor of the stimulus package.
The package will include direct payments of at least $1,400 (R21,000) to individuals who earn less than $75,000 (R1,100,000) of adjusted gross income, single parents earning less than $112,500 (R1,665,000), and married couples earning less than $150,000 (R2,220,000). Families with dependents older than 17 years of age will also receive $1,400 per dependent – limited to four dependents.
Donald Trump might also be eligible for a $1,400 cheque.
These thresholds may look unreasonable when converted to ZAR and thought about from a South African perspective, but the cost of living between the two countries needs to be taken into account when doing such a comparison. We’ll discuss this at a later stage.
The cheques alone are forecasted to cost the US economy $400 billion (R5,920,000,000,000) – that’s just under six trillion rands. To get a sense and perspective on how big that number is – South Africa’s main budget revenue is projected to be R1.35 trillion rand for the year 2021/22.
The news sparked excitement in the US community, earning Joe Biden a new nickname – ‘Money Bagg Joe”!
The rest of the stimulus package is aimed at getting most children back into the classroom, looking to spend $126bn (R1.7 trillion) - kindergarten (nursery) to grade twelve, $40 billion (R592 billion) for colleges and universities, $39bn (R577 billion) for child care $350bn (R5.2 trillion) to support state and local governments. After all of that, there would still be another trillion dollars to be spent.
Warnings have come about how this stimulus package could cause the American economy to overheat when vaccines are rolled out. Consumers with pent-up demand will be out in full force on spending sprees, and there will be too much cash chasing too few goods leading to upward pressure on prices and, in-turn, inflation.
In fact, this expectation has fed into the markets with the US yield curve steepening and the 10-year treasury note rising above 1.55% (its highest level since the beginning of the pandemic). Coupled with this was Jerome Powell’s statement that the US Fed will not be looking to stem the rise in treasury bonds.
Of course, we live in a globalized economic environment and all of this is not contained in the USA. Upward pressures in the US are likely to lead to upward pressures across the world.