What did the government stimulus achieve?

Aug 6, 2010

Ouzilly, France,

Here we are at the end of another week. What have we learned?

Not much. Yesterday, the markets went nowhere.

So, we'll think a bit more about Tim Geithner and the other men who rule us. Geithner wrote an article for the New York Times, "Welcome to the Recovery."

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The gist of the article was that though the recovery wouldn't be quick and easy, it was still real and moving forward.

You can read the article and come to your own conclusion, but we wonder:

Is Geithner really as 'out-to-lunch' as he appears?

Or, is he just in show biz... and he realizes it's time for a happy tune?

Our guess is that it is both. What is most remarkable about this whole episode is that the people who are most responsible for it - in the sense that they CAUSED it...and that they now pretend to FIX it - still show no evidence of understanding what it going on. Geithner did mention that households were paying down their debts. But he did not seem to connect the dots. He saw debt repayment as a sign of recovery, when it is actually the source of the slump. Neither he, nor Larry Summers, nor Alan Greenspan - and certainly not Barack Obama - has ever explained why we have a problem, what the problem is, or what is likely to happen as a result.

It's really very simple. The private sector ran up too much debt. It didn't have the income to support the debt. So, the bad debt has to be destroyed. Companies go broke - their stocks and bonds go to zero. Houses are foreclosed. Consumers declare bankruptcy. Banks close their doors.

It's not really such a big deal, in the grand, cosmic scheme of things. And maybe true Keynesian stimulus would help ease the pain. But who pays attention to Keynes? He said governments should do what Pharaoh did - store up surpluses in the fat years in order to release the savings in the lean years.

As Eric Krause puts it, a Doberman will stock up sausages before governments stock up savings. So, when the crunch game, governments had no savings with which to offset the debt destruction.

Too bad. But, that's just the way it is.

They might have admitted their failure and promised to do better next time. Instead, they decided to rescue the debt-laded economy...yes, you guessed it....with more debt!

The project was so loony from the get-go, it made us laugh. But some of the biggest names in economics - Krugman, Stiglitz, et al - are still pushing for more debt-financed 'stimulus.'

The trouble with it is obvious theoretically. Practically, it is even more obvious. In order to get money to give to the private sector, the feds first have to take it FROM the private sector. Ha ha...

(Or they can just print it up...a la Zimbabwe...but that's a whole 'nuther ballgame...one we will surely get to!)

And now we're nearly two years into the stimulus programs. What have we got? Here's the Financial Times with an update:

"Grimness of US unemployment.

"Sluggish growth - meet sluggish jobs. Initial jobless claims - the number of people who file for unemployment insurance each week - jumped by 19,000 to 479,000, its highest level since April."

"Economists polled by Reuters had been expecting a decline to 455,000.

:After declining sharply in 2009, jobless claims have stayed in the same range of between 450,000 and 460,000. A number closer to 400,000 is what you would expect for an economy with sustainable jobs growth."

What makes unemployment especially grim is that it now lasts so long.
As we reported earlier this week, more than 1.4 million people have become members of the "99ners club" - people who have been out of work for 99 weeks or more and have exhausted their unemployment benefits.

Two years without working is a long time. You lose your job skills. You get so used to not working that working becomes hard to do. And employers see you as a risk, because you're no longer active in the labor force and have not kept up with the latest trends in your field.

Many of these people may never work a real job again. Instead, they'll be marginalized for the rest of their lives...along with the millions of others who have given up real careers and real incomes.


The stimulus campaigns have wrought pretty much what we expected. Instead of stimulating the private sector, the feds have replaced private sector spending with government spending. Government's spending and investing is notoriously inefficient - which is to say, the politicians waste money. Much of the spending goes down a rat hole where it neither improves peoples' lives nor stimulates economic activity.

Since the counter-cyclical spending began, about $2.5 trillion has been put to work. What has it produced? More jobs? Nope. Higher incomes? Definitely not. Higher asset prices? Maybe.

Geithner's response is that 'it would have been worse if we hadn't done anything.' Here at the Daily Reckoning, we don't believe it. It would have been better if the feds had let the market clear...

Let it happen. Let it be. Let the chips fall where they may...so that others can pick them up and get to work again.

*** Summer is moving ahead...

The house is filling up. Maria is here. She's invited her friends. An actress from Australia... Another French actress... A Swiss friend... Two fellows she met on the plane on the way over from L.A....

A cousin and his wife from Maryland...an associate from Baltimore...

...a friend of Edward's... a friend of Elizabeth's...

...an antique dealer...a swimming instructor...

Well, it's "la vie du chateau." Which is how the French describe life in big country houses during the summertime. People come. People go. It's a delight to visit with them.

Each summer, we try to find a cook to make "la vie du chateau" run a little smoother. Typically, we find an unemployed student...a friend of the family...or just someone we locate through an announcement on the internet.

Invariably, the cook adds to the complex mixture of family/friends/associates...

"We've had some great cooks...and some terrible cooks," Maria explained to her friend last night.

"It's a very difficult job. I don't know why. Maybe just because of so many personalities involved. And the cooks are never really professionals. So, a lot of them seem to crack under the pressure. Some retreat to their rooms and we never see them. Others just go mad.

"I remember Donovan got so annoyed at the children that he chased them out of the kitchen with a meat cleaver. What happened to Donovan? The last I heard he was living in an abandoned building in Geneva...I think he's become a bum..."

"Then, there was Carole. She was our favorite. She is a black woman from Alabama. Boy, she made great food... fried chicken...grits...southern US cooking... And everyone loved her. And remember how she set Edward straight. She just looked at him and said in that Southern Alabama accent: "Edward, you're just like my son. And now I'm gonna tell you what I told him..."

"Edward never gave her any trouble...

"But the next cook we had was terrible. She couldn't cook. But that wasn't so bad. The real problem was that she was crazy. She'd smile all the time. And she'd pretend to be super-nice. But you knew she hated us all...and we thought she was planning to poison us...or kill us in our sleep. I started locking my door at night, just as a precaution...

"And then, when we had that birthday party for Dad, she lost it completely. She just started drinking champagne and didn't stop. And finally she fell down and had to be helped to her room. We didn't see her again for a couple days. And then when she came out she was smiling again...that crazy, demented smile that gave us all the willies."


Incredible Threat

Last week, Mr. James Bullard was being both cagey and clairvoyant. The president of the St. Louis Federal Reserve Bank noticed what everyone else has seen for months; the US economic recovery is a flop. GDP growth was last measured pottering along at a 2.4% rate in the second quarter, less than half the speed of the last quarter of '09. At this stage in the typical post-war recovery, GDP growth should be over 5% with strong employment. Instead, the 'Help Wanted' pages are largely empty. Homeowners are still underwater. And shoppers are still largely missing from the malls that once knew them. Whatever is going on, it is not the "V" shaped recovery that economists had expected. Many now worry that the recovery might have a "W" shape - a "double dip recession" form, with GDP growth dropping down below zero in this quarter or the next.

Mr. Bullard told a telephone press conference he worries that the US economy may become "enmeshed in a Japanese-style deflationary outcome within the next several years." That is exactly what is likely to happen.

But it is a little early for the Fed economists to throw in the towel. They still have some fight left in them. If they were really on the ropes, for example, they could throw their 'widow-maker' punch -- dropping of dollar bills from helicopters. This would make sure that the money supply increases, even if the normal distribution channel - bank lending - is broken.

In a celebrated speech on Nov. 21, 202, Mr. Ben Bernanke, then a recent addition to the Federal Reserve Bank's board of governors, explained why deflation was not a problem:

"Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost."

It was that technology to which Mr. Bullard referred when he ceased being prescient and began being cagey. He was not advocating dropping money from helicopters, not just yet. He was hoping he wouldn't have to. Instead, he was raising the menace of inflation, in the hopes that that would be enough.

"By increasing the number of US dollars in circulation, or even by credibly threatening to do so," Mr. Bernanke had continued, "the US government can also reduce the value of a US dollar in terms of goods and services, which is equivalent to raising prices in dollars of those goods and services.... We conclude that under a paper money system, a determined government can always generate higher spending and hence positive inflation."

There's the problem right there. The threat must be credible. Ben Bernanke's speech title left no doubt about his intentions: "Deflation, making sure it doesn't happen here." Back then, the reported consumer price measure stood at 1.7% -- slightly below the 2% target. Perhaps it was that 0.3% undershoot that set Ben Bernanke to thinking about it. If so, we wonder what he must think now. Today, the Fed is off-target by 75%, which is to say, the measured inflation rate is just 0.5%. It is beginning to look as though Ben Bernanke's reputation as a deflation fighter is more boast than reality.

The Fed's Open Market Committee meets on August 10th. On the agenda will be more direct purchases of US Treasury debt - bought with money that didn't exist previously. This is what economists call 'quantitative easing.' It is a way of increasing the money supply. But quantitative easing is not the same as dropping money from helicopters. If you drop money from helicopters there is no room for ambiguity, and no doubt about what happens next. In a matter of seconds, your currency will be sold off, your loans called, and your credibility ruined for at least a generation. Quantitative easing, on the other hand, is a much more subtle proposition. It allows the central banker to maintain his credibility, at least for a while, because it doesn't necessarily or immediately work. When the private sector is hunkering down, the money doesn't go far. Prices don't rise. Japan has done plenty of quantitative easing, with no loss to the value of the yen or to the credibility of its central bank. Europe has done it too. And so has America. The US Fed bought $1.25 trillion worth of Wall Street's castaway credits in the '08-'09 rescue effort. But instead of losing faith in America's central bank, investors bend their knees and bow their heads. Incredibly, the US now announces the heaviest borrowing in history while it enjoys some of the lowest interest rates in 55 years.

A threat to undermine the currency, we conclude, is only credible when it is made by someone who has already lost his credibility. That is, someone with nothing more to lose. Bernanke, Bullard, et al, are not there yet.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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