Folks, the U.S. is on fire in terms of inflation…
The year-over-year increase in the Consumer Price Index recently reached 8.6%. That’s the highest level since December 1981.
And yet, California thinks we should try to put out the biggest inflation fire in more than four decades with more gasoline. I’m not kidding…
By gasoline, I mean state officials believe we should put more money into circulation. I haven’t heard anything that backward in a long time.
You see, California Governor Gavin Newsom just came to a budget agreement. And in short, the state plans to give up to $1,050 in “inflation relief” stimulus checks to millions of eligible residents. These inflation-relief checks will total $9.5 billion overall.
And that’s not all. As Newsom and other officials explained in a statement…
“The package will also include a suspension of the state sales tax on diesel, and additional funds to help people pay their rent and utility bills.”
The sad thing is that California had a chance to do a great job and fight inflation. Instead, it chose a loud political win. And in doing that, it will make the current inflation fire even worse.
Let’s take a look at where everything went wrong…
First, California deserves some credit. The state ran a record-setting $97 billion budget surplus over the previous year. That’s awesome.
So it makes sense that the state’s politicians want to put that money to work. And handing out checks to millions of folks sure sounds like a good political move.
The politicians might even believe the basic premise, too. Let’s give people money so they can afford more expensive things.
In the short term, it will probably work. People will likely put that $1,050 to good use. But over the long term, it will only make the problem much worse…
You see, inflation is the idea that a dollar buys less goods than it did in the past.
For example, you used to get some eggs and a loaf of bread at the grocery store for about $5. But anyone who has gone to the store recently knows that just isn’t the case anymore.
Inflation happens when there are too many dollars in the economy (called the “money supply”). When dollars are so easy to come by, each one is worth less. And in turn, that means you’ll need more dollars to buy the same thing than you previously did.
In other words, adding more money to the supply – like California is doing with its inflation-relief checks – will just make every dollar worth even less.
That’s a problem because most folks’ salaries don’t adjust quickly.
If you make $50,000 per year, that doesn’t change every month. In many cases, it only changes once a year – or less.
But now, thanks to soaring inflation, you need to pay more money to get the same amount of stuff. That means you’ll have less money left over (if any). And the people living on a fixed amount of income get hurt even more in periods of high inflation (think retirees).
So ultimately, it’s important to tackle inflation as quickly as possible.
Instead of using part of its $97 billion surplus for these inflation-relief checks, California should’ve kept it completely out of supply.
That’s exactly what the Federal Reserve is doing by raising interest rates…
The Fed is raising rates (making money more expensive) so people borrow less. It’s also incentivizing people to put their money into a savings account (higher interest-rate payout).
In other words, it’s stopping people from adding to the supply. And it’s encouraging folks to take money out of the supply.
But California is doing the opposite…
It’s pouring more gasoline on the inflation fire. And it’s going to make things more expensive for the working class. That’s true even if it helps some people in the short term.
So what should California do?
Well, in 2021, data provider Statista showed that California had about $144 billion in debt. And it ran a $97 billion budget surplus.
You might think, “Obviously, the state should pay down its debt.” But in today’s environment that would likely result in more money entering the economy. It’s the same gasoline-on-the-fire problem.
It might seem crazy, but the best thing the state can do with that excess is… nothing.
Seriously.
California could put that money into a savings account. Then, it would earn enough money to pay a decent amount of the interest on its debt.
In turn, it would keep the state’s debt level from rising much. And it wouldn’t put the money back into the economy.
California had an opportunity to help fight inflation. But instead of doing that and improving its own financial status, it took the short-term political win.
And in the end, California is making the inflation fire worse.
Good investing,
Karina Kovalcik
