“A government which robs Peter to pay Paul can always depend on the support of Paul”. That quote was, interestingly enough, made by George Bernard Shaw, an avowed socialist. It rings true for many of us because of what we see in every day experience. Present day government is the formalization and enforcement of the business of robbing Peter to pay Paul.
Our current stimulus plan is one massive transfer from Peter to Paul. The American Recovery and Reinvestment Act of 2009 is an amazing document. It is 258 pages of funding opportunities, grants and programs totaling $825 billion, in addition to all of the previous and parallel efforts by the Treasury, Fed and FDIC. It sounds like trick or treat time. A billion for you, a few billion to you, and here, here’s an extra three and a quarter billion for you. That’s mere pocket change when everyone is thinking in terms of trillions now. However, if you own a casino or gaming organization, a swimming pool, aquarium, zoo or golf course, forget it. You’re not eligible. You have to find a different sugar daddy. All other comers are welcome.
Where is Peter in all of this? Look in the mirror. If you are a taxpayer, or if you use money, the value of which will be inflated away, or if you have children or grandchildren who will be footing the bill in the future, then say hi to Peter. You are him.
The stimulus plan injects mountains of previously non-existent cash into the economy, money that is made from nothing. The idea is that, if you use enough money to “prime the pump”, the economy will start working on its own. The problem is that the government has been priming the pump for decades. The booms and busts are the result of constant priming.
The underlying assumption behind the pump priming and the stimulation is that there is not enough demand for goods. Our fearless leaders want to stimulate us to buy, even though we were being condemned for consumerism when it was convenient for them. If our government really wants to stimulate our economy to the maximum amount, I have the foolproof solution.
I propose that the government buy printing presses with official currency plates for every family in this country, the bigger the denominations the better. That way, we, as consumers, wouldn’t have to wait for the banks to get stimulated in their own good time. We wouldn’t have to wait for dinosaur car companies to have a miracle rebirth. We each could stimulate our own economy.
Let’s say that printing presses would cost $10,000 each. If we use a nice round number of 100 million family units in America, it would take a measly $1 trillion to forever solve the problem of not having enough demand. Politicians could save all of the trillions of dollars of stimulus wasted by pouring them down the black hole they’re trying to fill now.
People could print money for everything their heart desired. They could dine at five star restaurants, drive luxury vehicles, live in huge mansions. They would be able to support a level of demand reserved now only for politicians, bankers, mega corporate execs, lobbyists, United Nations representatives and environmentalists.
It is obviously preposterous to believe that everybody making their own money would stimulate the economy. Nothing is produced by counterfeiting except dollar bills. There is no productivity, no real wealth creation. All that would result is a vast increase in worthless dollars. In that case, the winner in the economy would be the one who could counterfeit the most, the one who inflates the money supply and devalues the dollar the most. The losers are the ones who don’t counterfeit, or counterfeit the least.
The reason that it is preposterous to believe that the stimulus will work when private citizens do it is precisely the same reason that it is preposterous for government to do it.
The false stimulation may give some people profits, but those profits will come from the loss of purchasing power of the buying and tax paying public, not from the wealth creation process of free markets. It is inevitable that there will be a large number of “stimulus multi-millionaires”, those who most efficiently rape the system and the taxpayer.
The problem for investors these days will not be finding what industry or what business will be most productive, but rather, who will win the stimulation game. Good luck, Peter, you’re going to need it.
The Fed clearly is not letting up on its battle against “deflation”, we continually witness the call for further monies to be spent, with congress approving of it. If you are a Keynesian economist this is the right thing to do. Many Keynesians believe the Japanese economic collapse in the early 90s could have been avoided if the government had intervened earlier on in stimulating the economy. The first question however is whether this is really a battle against deflation. The current bust cycle in the economy is viewed as necessary in wiping out all excesses that may have arisen during the economic boom. So rather than calling this deflation, is this just a situation were prices across board are resetting to more appropriate levels or is this the meaning of deflation?
Do we really believe the economy can continually grow for years at a steady rate without a painful correction? Yes, in theory this is possible, but like economics teaches us, human behavior cannot be predicted, hence there will always be excesses, the party will always get wild once there’s liquor and no cops around, and the recession or bust is supposed to end the party, and clean up the mess in the system. In addition, the beauty about an economic bubble bursting is that ideally, it provides an opportunity for wealth to be spread across broad, people who have been conservative now have an opportunity to make carefully analyzed investments that are currently at bargain prices. In times like this cash is king, for anyone who has been prudent enough to save cash, or anyone who has access to low cost funds, these monies will be handy in a time like this.
Given this exciting fact, where are the opportunities then? We are witnessing a situation in which there’s more of a social system in place, and cash injections are going to big corporations that have been irresponsible in their behavior (we all know this and I wont rant on this). If in a capitalist environment, the consumer is the key driver; won’t it make more sense to have a bigger bailout for the consumer? If more money was put in the pockets of the American tax payer, this money will ultimately be spent and there will be somewhat of a recovery in the system. The Fed’s balance sheet in the course of this economic crisis has grown by $1.2 trillion, which is approximately $4000 for every American. Compared with a $500 dollar check, that’s more likely to be stimulating.
Now with the measures being employed by the Fed to combat this “deflationary cycle”, 0% interest rate, stimulus checks, absorbing bad debt, all done by money printing, the expected result is to have a bounce back in the economy. But when does the Fed know when to stop? Is it when we begin to see CPI come in at 0.5% over a couple of quarters, what economic indicators will tell the Fed that they can take their feet of the economic gas pedal? At any point the Fed get’s to this discovery, they most likely would have shot too far in stabilizing the economy. So will inflation in the system say to us that the Fed has done a good job?
From the current look of things the market is pricing in a long deflationary period, this is evident from the spread between the 10 Year Treasury bond and the 10 Year Treasury Inflation Protected bond. The current spread is approximately zero, which signifies the bond market believes that over the period of 10 Years, the inflationary concerns of the economy is priced in, and this is very misleading. Except one believes that just enough money that’s needed to restore the economy will be printed, inflation is definitely going to rise. In which case there will be a new economic crisis to deal with, so then again, does inflation really symbolize a recovery in the economy?
Has the U.S. economy touched bottom in this economic downturn yet? Or is there further to fall? Let’s look at the numbers and see if there’s a possible ray of hope beneath the data’s bleakness.
The latest figures for industrial production in the U.S., those for the month of April (May’s figures are being compiled by the Federal Reserve as of June 15), showed a 0.7% decline following a 0.2% rise in March. Most of these losses were in the automotive industry where manufacturers are dropping gas-guzzling SUVs from production lines that have been hit with strikes and strike-related parts shortages since February. There was also a large drop in construction supplies, also no surprise with residential real estate in a funk. However, mining, materials and business equipment all posted reasonable to sizeable gains when compared to production levels in April 2007, the first ray of hope.
Unemployment as calculated by the U.S. Department of Labor climbed to 5.5% in May from 5.0% in April, mostly due to job losses in construction, manufacturing, professional and business services and retail stores. The only bright spot here seems to be the healthcare industry, which added 34,000 jobs in May 2008 and 383,000 jobs since May 2007. These are not encouraging figures, although there is a possibility they’re slightly skewed (by 0.2%) by job-seeking recent college grads and high schoolers out for the summer.
Retail sales for May surged 1% over those in April quite possibly as a result of tax rebate checks suddenly appearing in everybody’s mailboxes. This is much higher than anticipated and will contribute substantially to future economic growth figures.
Soaring Prices Translate to…Meager Growth?
Inflation pressures are climbing in the U.S. and the rest of the world due to skyrocketing commodities prices. The most recent report from the Labor Department indicates that consumer prices rose 0.6% in May and are 4.2% higher than they were in May of last year, meaning that currently prices are rising faster than real income which measured only a 0.2% rise in April 2008. Leading the pack, of course, are surging energy costs, up 4.4% in the month of May and up 16.5% in the first five months of 2008.
The mother of all economic indicators, the one that matters the most, is the gross domestic product or GDP which measures how much larger or smaller the entire U.S. economy is as compared to the previous month, quarter or year. Early estimates of U.S. GDP growth for the first quarter of 2008 measured 0.6%, but as additional data came in, that figure was revised upward to 0.9%. As quarterly growth goes, that’s a pretty measly figure, but the fact remains that it’s a positive number, not a negative one which would indicate a recessionary contraction.
The Only Thing That’s Falling
Everyone’s biggest economic concern in the U.S. in 2008 must be the housing market which is seeing double-digit declines in home values in some regions of the country. However, the operative phrase there is “some regions” because, according to the Office of Federal Housing Enterprise Oversight, the double-digit losses are only in California and Nevada while housing devaluation over the previous twelve months is limited to 14 states and the District of Columbia which were substantially overpriced in a “bubble” that did not reflect the true value of houses in the area. (Read the news release here.)
Housing prices in some of these regions, including parts of the northeastern states and the industrial northern midwest, are also being affected by shifting demographics as more people are moving out of these areas than are moving into them, leaving an inventory of unsold and devaluing houses behind. (See “Do U.S. Economic Indicators Still Reflect Reality?” for specifics.)
So what’s next for the U.S. economy?
A recent conservative forecast by Wachovia Bank, which has a fairly good track record at this, shows the economic stimulus from the tax rebates boosting retail spending through the end of September 2008 before finally petering out. Although sections of the housing market are predicted to continue declining throughout the remainder of 2008 if not longer and unemployment may rise briefly above 6.0%, both the price of crude oil and consumer inflation are forecast to also diminish through roughly the same time frame. All in all, in only one quarter, the fourth quarter of 2008, is the economy predicted to actually contract, making this a shallow downturn indeed and 2009 a new and hopeful year for economic recovery.