The Simple Math of a Failed Stimulus

The economy is growing! The economy is growing!

A new report, released yesterday, says that real growth in gross domestic product (GDP) -- otherwise known as "the economy" -- was 1.9% during the second quarter. Trouble is, this data comes with two giant caveats:

  1. Growth was lower than the 2.3% economists had expected.
  2. Gross domestic purchases -- a measure of demand -- fell for the second time in the last three quarters.

Translated, this means that the much-ballyhooed stimulus package likely had some effect, but not as much as the experts thought it might. Me? I'm not surprised at all.

I'm not a number-cruncher or a brilliant prognosticator. I just know what I read in my credit card and home equity statements, and in my paycheck. I'm making less, I'm paying interest on borrowings, and my savings options aren't thrilling. The average five-year CD from credit-crunched financiers such as Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and Wachovia (NYSE: WB  ) is just 4.13%, Bankrate reports.

I can beat that -- easily -- by paying down debt. Chances are you can, too. The Federal Reserve says that U.S. consumers held $961.8 billion in revolving credit in May, up 7% over last year. Credit card interest rates, meanwhile, remain firmly in the double-digits -- a sliver of sunshine that illuminates an otherwise murky view for plastic-pushers such as Citigroup (NYSE: C  ) .

Pay off the 20% you're paying to hold a balance on the world's worst credit card, or spend on more crap to "boost the economy?" Consumers, even when it isn't in their economic interest to do, tend to choose the latter. But this is the new look-at-how-little-buying-power-the-U.S.-dollar-has-now economy, and they finally appear to realize that the price of plastic is too high.

"Credit card spending in general is much softer," Visa (NYSE: V  ) CEO Joe Saunders said in describing credit use in the U.S. during this week's earnings conference call. "It's not down, but it's marginally up, in the low single digits. Our debit card spending, on the other hand, has continued to grow and is very robust."

Less credit, more cash -- now that's the sort of long-term stimulus a Fool can appreciate. It's the kind that leads to interest earned, rather than interest paid.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. He also picks growth stocks for Rule Breakers, which counts Bankrate as a holding. Get a daily dose of Tim's Foolish musings via this feed for your RSS reader. The Motley Fool's disclosure policy is both interesting and interest-free.

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  • Report this Comment On August 01, 2008, at 4:01 PM, andys2i wrote:

    The stimulus package and the housing relief package will only be minor growth drivers. These are more political than substansive actions. As I wrote in detail here - - Apart from a short term slowing of the current housing market crisis and credit crunch, the bill will only delay the inevitable downward spiral. Unfortunately the American and global economy is heading into a recession, not out of one. So the housing bill, like the stimulus checks, will only have a temporary affect. The government again is trying to spend us out of an economic crisis, which is unlikely to work and only add to our national debt and the continued devaluation of the US dollar

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