»The Daily Reckoning by Bill Borner

Recovery programs increase poverty
27 AUGUST 2010

Ouzilly, France,

We went to our last summer soiree last night. It took place at a neighbor's chateau, where a large, ancient stone barn had been transformed into a dining room for 100 people.

"We're screwed....so are you..." said a friend.

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First, an update from Wall Street: the Dow was unable to sustain a bounce yesterday. It fell 74 points. Gold dropped $3.

Hiring...house sales...the latest news confirms that there is no real recovery going on. And now this from AP:

"The government is about to confirm what many people have felt for some time: The economy barely has a pulse.

The Commerce Department on Friday will revise its estimate for economic growth in the April-to-June period and Wall Street economists forecast it will be cut almost in half, to a 1.4 percent annual rate from 2.4 percent.

That's a sharp slowdown from the first quarter, when the economy grew at a 3.7 percent annual rate, and economists say it's a taste of the weakness to come. The current quarter isn't expected to be much better, with many economists forecasting growth of only 1.7 percent.

Such slow growth won't feel much like an economic recovery and won't lead to much hiring. The unemployment rate, now at 9.5 percent, could even rise by the end of the year.

"The economy is going to limp along for the next few months," said Gus Faucher, an economist at Moody's Analytics. There's even a one in three chance it could slip back into recession, he said.

In addition, the impact of the government's $862 billion fiscal stimulus program is lessening.

That leaves the private sector to pick up the slack. But businesses are cutting back on their spending on machines, computers and software, according to a government report earlier this week. And the housing sector is slumping again after a popular home buyer's tax credit expired in April.

"What we're seeing is that the hand-off to the private sector is not looking as robust as we had previously hoped," said Ben Herzon, an economist at Macroeconomic Advisors.

A handoff? What an imagination!

As if the private and public sectors were running a relay...cooperating to make our lives richer and better...based on a game plan developed by the coaches at the Federal Reserve!

We have news: it doesn't work that way.

'Okay, Mr. Smarty Pants, how does it work?'

Glad you asked.

In the real world, the economy is always making mistakes...and always correcting them. Making mistakes...and correcting them.

And markets are always discovering what things are worth. They figure out what one thing is worth, conditions change...and they change their minds.

There are times when the economy makes a big mistake - especially when it is given the wrong signals from the Fed. And there are times when markets change their minds dramatically.

Investors don't like it much when the economy and the markets turn down. It makes them look like morons...which they usually are. Businessmen don't like it much either. Falling sales or failing businesses make them look incompetent and reduce their compensation. The average person doesn't like it because he loses his job...and sometimes his savings. And the politicians don't like it because they pretend to have everything under control; when things seem to go wrong, voters blame them.

So, the politicians - with their lackey bureaucrats and stooge economists - take action. They do something! Newspaper columnists and TV commentators argue about whether they do the right thing or the wrong thing...too much or too little...too soon or too late. But actually, anything they do will be wrong - unless it is merely removing some previous 'improvement.'

'Wait a minute, are you saying that all these recovery programs...and raising and lowering interest rates...and providing support for key industries...and help for people who are unemployed...are you saying all that is a waste of money?'

Oh no, we're not saying that. We're saying it is worse than a waste of money. It makes people doubly poorer - first because of the actual cost of the recovery programs themselves...and second because the programs interfere with the economy's efforts to correct its mistakes and find proper prices.

Even the most apparently benign - and some would say, humanitarian - government interference is far more harmful and costly than people realize. Take jobless benefits, for example. At least they don't do any harm, right?

Wrong! Jobless benefits rob Peter to pay Paul because Peter has a job and Paul doesn't. Why do that? Paul might take his time finding a new job.

There are no new jobs, you say? Don't be ridiculous. There are always things that need to be done. Jobs are like anything else; you just have to find the market clearing price. If wage rates were low enough everybody would have two jobs. But who wants to work for substantially lower wages? No one. Most people will only do so if they have to. As long as he is getting unemployment compensation, Paul doesn't have to.

'Whoa...this is radical...sounds almost subversive. You're saying government shouldn't be involved at all.'

'Oh no...we don't give advice here at the Daily Reckoning. We're just saying that if people want to be poorer they should invite as much government meddling as possible.... Get government to make lots of rules and then change them often... Put everyone on the government payroll; turn them all into zombies..."

*** "Here in France, we always seem to start out with the right idea," continued our friend last night. "At least, it doesn't sound bad. We're trying to correct a problem or make people's lives better.

"So we require towns to have a place where people traveling in trailers can spend the night. Some people live like that. They live in trailers or motor homes...and travel around. And they were causing a lot of problems because they didn't have clean places with water and electrical hookups. So now every town is required to have one of these parks.

"Well it didn't take the gypsies long to figure out that they could live permanently in these parks. So they set up encampments and they live there. And if you believe the press reports they deal in drugs and stolen property. And when the police went into one of these parks the gypsies fired on them with guns.

"Sarkozy decided it was time to get rid of them. But now the gypsies are protected because they're a minority.

"That's the way it works. Every time you try to do something to help people - like setting up these travel parks...or preventing people from discriminating against minorities - it eventually backfires. People always find a way to twist these things to their own advantage.

"And now I've got a situation that really makes me mad. I rented a small house to a young guy who seemed nice enough. He pays almost no rent. But he stopped working almost immediately. And then he brought his girlfriend to live with him. They don't do anything but lie around all day and use drugs, I think. And play loud, awful music. So, I wanted to get rid of them. But they went to some legal counselor - paid for with my taxes, probably. He told them that the house I rented was not up to legal standards...and that they can force me to put them up in a hotel while I make the repairs. And then I can't kick them out because it will be considered retaliation for their causing me to bring the house up to European rental codes.

"I'm sure the housing codes and protecting renters all sounded like good ideas. But they always find some way to twist them against you."


Zen and the art of economy repair

According to an article that appeared in the New York Times, written by Norihiro Kato, the Japanese have gotten good at sloughing off their worldly cares. Japan is no longer the world's number 2 economy; it was eclipsed this summer by China. But the Japanese are used to slippage. We all know the story of their 20-year economic decline; Japan's GDP actually peaked out about 15 years ago. It has been sliding ever since. That is only a part of the story. In terms of rice production, the Japanese have been downsizing for more than 40 years. Japan's population, too, grew by 1% per year from 1917 to 1977. It peaked out in 2005. There are fewer Japanese now than there were 5 years ago. If the trend continues, eventually there will be none.

Our back page dictum: people come to think what they must think when they must think it. What do people on the road to extinction think? Ask the Japanese. According to Kato, they become less competitive and more reflective, almost zen-like, turning an eye inward, away from striving, fighting, jostling and whacking...gracefully accepting whatever the economic gods send their way. In the meantime, they stay at home and save their money; like a lap dancer in retirement, they know it is all downhill from here.

Over in the developed West on the other hand, resignation and capitulation have not yet caught on. People still rage against the dying light of the Bubble Epoque and count on quantitative easing to get it going again.

In the US, half a million Americans filed for jobless benefits last week - the highest number in 9 months. At this point in a typical recovery, job growth should be strong. Instead, it is shockingly weak. As for house sales, the drop in July was the greatest one-month decrease since 1968. Again, the direction is all wrong. Housing led the US out of 7 of the last 8 recessions. Now, it is holding it back! One out of every 7 mortgages is delinquent or in foreclosure. The nation is on target to foreclose on more than a million houses this year - a new record.

So let us take up a serious question. If an economy cannot trot out of recession, what becomes of it? To Japan or not to Japan? There are so many economists voicing an opinion on the subject that if you spent 5 minutes listening to each one you would have to be an idiot. There are those who think Europe and America will follow in Japan's footsteps. And those who think it will not. Taking no chances, our Daily Reckoning has firmly held both opinions at one time or another.

The US is not Japan, say many. Japan's 20-year slump was made possible by three unique circumstances: deflation imported from China, falling commodity prices and a current account surplus. The US is confronted with the opposite situation: commodities prices are strong, its current account is in deficit, and China is raising prices. These differences will bring on a crisis Japan never had to face. Interest rates will rise. The dollar will fall. Unable to finance its deficits at low rates, the US will unable to stay on the road to Tokyo. Instead, it will soon be detoured to Buenos Aires. Or Harare. The resulting panic will have nothing in common with Japan's orderly ruination.

Those who think the US and Europe are following on Japan's heels have at least the flow of current news to support them. Japan fell into a slump. Rather than let its markets clear, its government supported zombie banks and businesses with money borrowed from the public. This effectively transferred the burden of debt from the private sector to the public sector, while holding the economy in a state of suspended animation for two decades. Meanwhile, Japan's people were getting older...more cautious...and more resigned to slippage.

This seems to be what is happening in America too. The private sector is de-leveraging. The latest report shows credit card debt at an 8 year low. Mortgage debt is dropping sharply too - thanks to defaults and foreclosures. Banks and private companies are stockpiling cash in anticipation of a cold winter. Households are playing it cool too.

Ben Bernanke must have gotten the message sometime between the 4th of July and the Assumption of the Virgin. On the 11th of August, the Fed announced another round of quantitative easing designed to fight against the decline. Of course, Japan tried quantitative easing too. It failed, just as monetary and fiscal stimulus had failed.

But who knows? Maybe the Japanese are just losers. They are the only people on earth to have atomic weapons dropped on them. Then again, that only seemed to encourage them. After 1945, the Japanese and the Germans picked themselves up and went from absolute ruin to become the world's most admired economy. Let us hope the authorities don't draw the obvious lesson: on the evidence, nuking may pack more stimulus punch than quantitative easing.

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