Why the Stimulus Plan Won't Work 39 comments
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The Sahara Desert used to have fish.
Many people do not know this, but over the last 120,000 years or so, there were no less than three distinct time periods when what is now a desolate expanse of sand was instead covered with rivers, lakes, and grasslands. In fact, millions of years ago, evidence points to the area being a prehistoric ocean.
The only factor that can create such change is time. No one came in all those years ago with livestock that drank up all the water, and no one can run out today, throw a few garden hoses out there, and create a golf course.
Are we grasping the metaphor yet? We need to stop trying to water the desert.
Economic relief with the change in your couch
I like Barack Obama. No joke, I think he is an intelligent – actually brilliant – man, well-educated, charismatic, and a natural leader. Americans largely seem to agree, embracing his ideas that slate the economy as a top priority (of course, if he didn’t, they would have his head).
If we want to turn this economy around, he asserts that we must take drastic measures to restore consumer confidence, business investment, and the economy in general.
And apparently $1,000 per family will accomplish this task.
Yeah, yeah, I know there are other measures included for businesses and the whole thing hasn’t even passed yet, but that is not the point of my argument. These stimuli that have been proposed and dealt out over the past several months cannot and will not have their intended effects on our economy.
What is being proposed is a package that is supposed to “jump start” the economy, encourage spending and investment in business. Here, everyone. Here’s a grand.
Have you ever heard something so funny that you couldn’t even laugh at it because you felt so sorry for those people who took it seriously? That’s how I feel right now.
If you want to artificially fix the economy (which is the unintelligent, flawed mentality that got us into this position in the first place), then we would have to throw a lump of cash at individuals that would actually change their financial situation. An amount of money that would pay off most of their debt, and possibly their upside-down mortgages. Maybe something in the neighborhood of $100k per person.
I know this is impossible, and absolutely ludicrous to seriously suggest.
My point, however, is that the amount of money it would take to “fix” our economy would destroy our currency (not that it’s not already on its way with each step we take) and result in the collapse of our entire financial system.
Don’t get me wrong. I want $1,000. Who doesn’t? But what do we really think this is going to accomplish? Here’s an interesting tidbit: Panasonic (PC) has stated that it plans on boosting sales of its flat screen televisions by 50% in the next business year… a bold statement showing its astronomical confidence that the average consumer is a moron, and will most likely blow his or her entire “tax relief stimulus” on the company's very product.
At what future cost are we going to receive these checks, and will one thousand dollars make enough of a difference in anyone’s life to somehow change the financial landscape that is currently so overgrown with weeds?
Put it on a credit card
These types of proposals manifest the true inability of anyone in any position of power in this country to learn. I can make my next point very briefly because my colleague Nicholas Jones recently did a nice job of it in an article last week.
We will pay for these whorish, extravagant, asinine maneuvers with future US dollars, putting us in a very similar fiasco we’re currently dealing with in the credit markets. We are under the false impression that the pedestal our treasury debt has been put upon in terms of safety will always remain standing, and that our increasingly global economy will not wise up to the fact that the United States is becoming less and less stable as time goes on.
If debt is harder to sell, then we must print more money to finance our stupidity, our currency devalues further, and round and round we go.
Doing something is not better than doing nothing
I am about to take issue with something that Mr. Obama has said very recently in regards to our economy. Before I do so, I would like to point out that I realize whatever he says publicly is purely for show and is intended to maintain the desired perception of the country. I also am aware that Mr. Obama and his colleagues understand that most people in the United States don’t know a darn thing about economics, but – worst of all – like to pretend that they do.
All that being said, he still has a choice of the words he uses. And the phrases, “if nothing is done, this recession could linger for years” and “for every day we wait or point fingers or drag our feet, more Americans will lose their jobs” are not comforting words to investors and the public in general. So, he is perpetuating – in fact, exacerbating – the fears that people are already experiencing.
More fear results in more panic, which results in even less spending than before.
Long, slow, weak recovery
America has seen its shadow, and it looks like we’re in for an extra-long winter and a difficult road back to prosperity.
Total job losses in 2008 have exceeded 2.6 million, and unemployment is at 7.2%. Job seekers outnumber employment openings by three to one. Countless citizens who were living the American Dream, earning close to six figures are now settling for any old job that will pay them $35k per year.
What this amounts to is a country full of people making sacrifices, living smaller and more simply, and forgoing the little luxuries that the past two decades have made us accustomed to. What’s worse news for the economy is the fact that many of these people are realizing that they can survive on less, and put a high value on rebuilding the capital and resources they have lost over this whole debacle… and therefore may not go back to their old spending habits as quickly as the markets, particularly retail, would like.
Disclosure: No positions.
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This article has 39 comments:
We're not going to fix the problem by doing the very things which got us into trouble!
I can appreciate John's stand of having no positions, not jumping into this and that with both feet in. Keep powder dry and strike long or short as the market leads the way up or down.
In the 1980's recession Ronal Reagan implemented a market solution by reducing taxes and wasteful government spending, and the economy recovered within two years and started the era of unparalleled prosperity and the bull market that just ended.
So, despite the Keynsian stampede debating not if, but how large a stimulus is needed, I think Reagan had a much better approach.
We are living in stupidity.The cause of the trouble is financial institutions giving loans that borrowers could not assume and now it is exacly what Obama want institutions to repeat.
Throwing huge amount of money for alternative energies could only satisfy the leftist activists as those energies will not not be operational for another 30 years.FASTEN YOUR SEAT BELTS.
Reagan " voodoo economics" left Bush I with a HUGE deficit and culminated in one of the worst stock market crashes is U.S. history.
Now, we have someone willing ( with the mandate of the people ) to try and straighten out this mess. The Republicans main fear is that Obama's stimulus deal will be rather successful and thus relegate the Republican party to the dustbin of history. This is likely, imo.
At the rate the gummint is going into debt, it will soon have an annual bill for interest on the national debt greater than the amount it takes in. By "soon" I mean within a decade or two. And while it does make sense to repair our crumbling infrastructure, it really should have been done out of budget, not by floating yet another massive loan.
Please spare us all the partisan finger pointing. Republicans and Democrats alike have based their policies on deficit spending and this new "stimulus" package is just another bipartisan plan to continue their deficit spending ways. It's what I call "same stuff, different day".
Every one of us who took and passed a logic course understands clearly that any policy or plan based on a faulty assumption will fail. The idea that we can continue to grow the economy forever to cover our mounting debt is a faulty assumption.
This, too, will end. Badly.
Maybe the President-elect can learn something from that gentleman, by which I mean that maybe he can borrow his way out of trouble.
The government has incorrectly divided a single problem into two:
1. The near-term problem: extreme weakness in the economy. Solution: bail-outs, fiscal stimulus, and monetary easing. Outcome: economic stabilisation (i.e., back to 'normality').
2. The medium-term problem: reining in fiscal and monetary stimuli and clearing up their consequences (notably defecits and public sector debt). Solution: that's for tomorrow's in-tray, but the Fed/BoE will make sure it's 'alright on the night'. Outcome: Goldilocks lives.
In reality (or at least my version of reality) there is just one problem, which was born at some point in the early '80s and will stretch indefinitely into the future until somebody has the nerve to address it. The economic model based on asset price bubbles fuelling binge borrowing at improbably low interest rates fuelling overconsumption is broken; it might be possible to 'fix' it temporarily - depending upon how 'successful' the stimuli are and how dumb already overindebted consumers are prepared to be - but it is not sustainable.
Debt has been confused with wealth, and that got us into this situation. Sooner or later, real wealth is going to have to be created by saving and investing; slower growth will have to be accepted, because endless flows of cheap debt used to finance industrial overcapacity (e.g., toys, cars, consumer electronics etc. etc.) and individual overconsumption are not compatible with a sustainably healthy economy or currency. The trouble is, most people don't want to hear this and the political cycles in our countries are so short that politicians are loathe to take risks with their careers by telling it like it is. (I am assuming here that there are at least some politicians on both sides of the Atlantic who do indeed know what's going on - an assumption that's arguably worth a 'thumb's down' in itself.)
Maybe the next 'Black Swan' will be a President who really does understand that the model is broken and a 'Plan B' is needed. I don't know enough about President-elect Obama to make that judgement, but the faces in his team and the rhetoric underlying his stimulus intentions don't make me sanguine. Over here we've probably got another 18 months of Brown - by which time I imagine the IMF's 'phone number will be on Treasury's speed-dial.
On Jan 11 09:50 AM bosun.j wrote:
> He wasn't a war hero. He was an actor. He was the second worst president
> in American history.
$52 Trillion worth of debt. It is going to take years to accomplish correctly.
Your main mistake in this article was to use political and politicians in your metaphors. The responses prove my point. Rather left or right is of no
useful purpose; too much supply side economics fron one group, translates
into another believing that demand is the answer.
Econ 101 people.......!!!
Supply/Demand equations are an elastic property.......
For those of us who read these blogs for financial purposes, we are getting tired of the political 'bents' being put forth!!!!!!
If you want to make money (or just save want you have), please refrain from the politics. Yes, I know that it was the politicians that screwed it all up in the first place..... old news.
Real wealth is made during these times; when the rubber band is streched to far to one side (left or right). We know that it must, at some point snap back. Let us share experiences so that we may ride the wave back towards a normal (Relative) shape.
The change of politicos' at the top does not change the laws of economics, (regs. being equal of course) just the noise maker in the room.
On Jan 11 11:41 AM shootpar2001 wrote:
> I liked your overall viewpoint and examples of how we are trying
> to erase
> $52 Trillion worth of debt. It is going to take years to accomplish
> correctly.
>
> Your main mistake in this article was to use political and politicians
> in your metaphors. The responses prove my point. Rather left or
> right is of no
> useful purpose; too much supply side economics fron one group, translates
>
> into another believing that demand is the answer.
>
> Econ 101 people.......!!!
> Supply/Demand equations are an elastic property.......
> For those of us who read these blogs for financial purposes, we are
> getting tired of the political 'bents' being put forth!!!!!!
>
> If you want to make money (or just save want you have), please refrain
> from the politics. Yes, I know that it was the politicians that
> screwed it all up in the first place..... old news.
>
> Real wealth is made during these times; when the rubber band is streched
> to far to one side (left or right). We know that it must, at some
> point snap back. Let us share experiences so that we may ride the
> wave back towards a normal (Relative) shape.
>
> The change of politicos' at the top does not change the laws of economics,
> (regs. being equal of course) just the noise maker in the room.
>
politicians don't make economic decisions...
they make political decisions...
with economic outcomes!..
just get out of the way politix dudes...
first...do no harm...
don't just do something...stand there...
jim rogers said...they should have left the LTCM alone and let it go...
we should have taken the dot com hit...
the politix have meddled us into this fix...and meddling will NOT get us out of it!
It's already happening.
I work with homeowners in default, and I can tell you this:
People are being FORCED to look at their spending.
Small business people are being FORCED to look at (create) P&L's (you wouldn't believe how many ask "What's a P&L?").
And... many, many people are waking up to the fact that a fair amount of their discretionary spending has not yielded a lot of value.
There was a time when folks could let their dollars come and go as they pleased, "re-charging" their credit lines via the house-ATM. And nobody seemed to notice that a lot of the stuff that they bought wasn't really worthwhile. It didn't matter, because you could just move on to the next purchase.
Those days are over.
It's not that they may not choose to go back to their old spending habits, it's that they won't be able to.
You said: "I also am aware that Mr. Obama and his colleagues understand that most people in the United States don’t know a darn thing about economics, but – worst of all – like to pretend that they do."
I would suggest that this also applies to a sub-set of the citizenry - economists. Oh, okay, I overstate. But certainly economists also know a lot less than they pretend to.
I think the assessments you make in the article are appropriate. Good job.
To all commenters - - -
It may sound strange, but I think everyone has a portion of good logic, in spite of the sharply diverse opinions on economic cause and effect and political opinion. The reason is that what we are talking about has no "universal truths", but a range of historical perspectives that are conflicted.
OldLimey - - -
I particularly appreciated your comment. It is a perspective from a distance, but not a bad one. You may actually see some of the forest while all us locals are concentrating on trees.
I would say that I think you might have added a third subdivision of the government action on the current problem: The Longer Term Problem.
The longer term problem revolves around how the actions taken in 2009 (and 2010) will affect the productivity and health of our economy 5-10 years in the future. If we spend our resources and build debt to make 2009 and 2010 "more comfortable", without making sufficient effort to enable economic growth 2013 to 2018, your analysis of the near-term and medium-term describes a quite likely outcome.
You said: "Debt has been confused with wealth, and that got us into this situation." There is no more important statement in this article and the entire comment stream than that.
Finally, you said: "Over here we've probably got another 18 months of Brown - by which time I imagine the IMF's 'phone number will be on Treasury's speed-dial."
What if the IMF telephone has been disconnected for non-payment of the bill?
The article, which is mostly good, is fatally flawed by the final sentence. It is, in fact, un unmitigated good thing that people are starting to save again. No nation can spend its way to economic health; capital is formed and wealth generated by savings and capital investments based on savings that are lent out to entrepreneurs.
The political partisans of both sides are wrong. Keynesian economics is what Obama and GWB both rely on, and the result will be massive inflation and the destruction of the dollar. And the supply-siders run up the national debt just as fast as the Keynesians; they just create and spend money on different programs. And all you Obama fans --- aren't you just a little bit puzzled as to why he's appointing the same old pols and well-connected financial types that helped get us into trouble?
Businessmen and corporations have allot more of it than Jane and John Q. Public. Money talks and BS walks.
The only positive aspect of Obama's presidency may turn out to be that the world doesn't hate him as they do his predecessor.
On Jan 11 03:12 PM Glen L. wrote:
> And all you Obama
> fans --- aren't you just a little bit puzzled as to why he's appointing
> the same old pols and well-connected financial types that helped
> get us into trouble?
>
On Jan 11 10:15 AM Shank75 wrote:
> First you say "I like Barack Obama. No joke, I think he is an intelligent
> – actually brilliant – man, well-educated, charismatic, and a natural
> leader". Then you trash his economic plan (I agree with you there).
> So which is it "brilliant" or a loser?
"What really matters . . . is the strength of the
currency. Britain has nuclear weapons, but the
pound is weak, so everyone pushes it around."
—John F. Kennedy
Get ready to have the US pushed around.
New proposals come out, they get some nods some ?'s, etc.
on and on.....
There is No fixed Proposal, there are approximations of Might Be Proposals which May be Modified but may not..
Come on People, we are being played.
next i think there isn't much 1 trillion dollars will do to encourage baby boomers to indulge in greed again , thats for the next generation. i am worried about deflation and if, thats neither big or small cause i don't know, the trillion and the lining of pockets that will absolutely happen keep us from deflation and a depression then my 4 children can pay for my mistakes later. i think the remainder of the world will overinflate more than us and it's the relative inflation that matters so we should stay out of a depression ( i hope )
I rarely spend a lot of time talking up Hitler but building the Autobahn did a lot more for Germany than 60% of the transportation projects that I see. The average distance between cars and the average distance between registered drivers is getting smaller and smaller every year when compared to the inventory of lane miles of road. The average speed is going down and no one can demonstrate any relief from congestion except by building more lanes.
I think more money is going to cause about the same as what would be expected if a drunk won the lottery and continued to follow the old habits with even more capability.
Much of our current dilemma stems from wealth and wage imbalances that resulted from WW2, as America came out with industry roaring while much of Europe was in ruins. In many ways, that's what's been unwinding for several decades and has now reached a crucial point.
On Jan 11 08:16 AM prudentinvestor wrote:
> In the 1930's, FDR implemented an activist big government recovery
> plan. Eleven years later, the economy had not yet recovered, and
> it took a world war to re-boot it.
The Human Investment Tax Credit Proposal
www.aesopinstitute.org/
Download this document from the above site:
a_human_investment_tax...
The Remortgage the Nation Proposal
remortgageamerica.blog.../
The comments on this site are quite interesting. Especially those from real estate professionals.
I do not think the full frontal traditional Keynesian tools will work in this crisis nor am I an ideologue on the Austrian School either. This is my general take on Ludwig von Mises and Friedrich Hayek:
www.youtube.com/watch?...
I believe it will take a new hybrid of macro and micro economics in 2009 to address this mess. I feel so far everything we have done is absolutely worthless and Henry Paulson will indeed be crucified in both American and World History. Like the author, I like President Elect Obama very much. I also like that he has apparently enlisted self styled Ivy League Masters of the Universe Summers, Rubin, and Geithner to go out to try to defuse the Credit Default Swaps financial nuclear weapons they helped create. If one goes off and vaporizes them and their reputations in world economic history I feel it is a marvelous karmic end. But it is certainly worth a try to send them in first to be irradiated . The Obama Administration is starting out as a kind of SAW IV movie and I really like that.
What is your honest assessment of GWB then and his performance as President of the United States?
What do you feel were his credentials that are better than Obama's?
Thanks!
On Jan 11 01:22 PM John Polomny wrote:
> Interesting to note the amount of positive thumbs up given to posters
> who are in support of government intervention in the economy. I would
> suggest excess involvement in the economy by the government was one
> of the major factors leading to this situation we find ourself in
> today. As far as Barack Obama being brilliant I do not see the evidence.
> Where is the record of success. He was President of the Harvard Law
> Review yet there is no published work? He was a state legislator
> yet from what I can find he was a back bencher. Because of a unique
> situation that occured in Illinois he was able to get elected as
> a US enator. His opponent was Alan Keyes remember. No he is more
> of a Elmer Gantry opprutunist that has been in the right place at
> the right time. Either that or the first affirmative action president.
> He is talking trillion dollar deficits for the next few years. Check
> his math as the deficit over the next year may be closer to $2.5
> to $3 trillion. It will never get there though as the bond market
> or the currency will blow up before that. Obama is as they say on
> the southside of Chicago "pimping" the american people. It wil be
> delicous watching the disappointment set in as he and his sychophants
> try to solve our economic problems with FDR and LBJ solutions which
> cannot and will not work.
Change and "he doesn't get it" were what Obama used.
So far its been "same old, same old".
We know whats happening and we are working on it...
Its the same old song with a different singer.
It doesn't matter whether you are poor, middle class, or wealthy we are all apprehensive about the future. Don't expect the personal fiscal stimulus to stimulate more consumer buying beyond the necessities to maintain the minimum quality of life we are accustomed to.
How do we restore confidence in the American Way of Life [ I am not sure I have all the answers.] But firstly I would do a thorough overhaul of our financial system and make it transparent to all investors-- such things as a complete investigation of hedge funds-with new "moral" inspired regulation including restoration of the uptick rule , real enforcement of "naked short selling", possible limitations on manic computerized trading, and regulations that create transparency to the whole hedge fund industry [ is their collusion in trading practices between some hedge funds?]
Secondly, and I am not sure of the mechanics involved, but i would suggest limiting the number of times a securitization product could be traded-- maybe twice-- maybe then buyers would know what they are buying and we would not have the problem of "toxic" securities and how to value them.
Thirdly, with little personal knowledge of how to do it we must setup corrective measures and enforceable guidelines for the home ownership and mortgage industry.
If the new Obama administration would focus their attentions immediately to correcting the abuses in our financial institutions, then we have a chance of restoring confidence all along the line. Investors ** will come back to the market place with the expectation that greed and abuse [ with human beings involved , we will never eliminate these traits] will be minimized and be manageable.After investors return to the equity market place, the man in the street consumer with more confidence in his 401 and other retirement plans will become a "real consumer" again with trust and confidence .
** According to data from Bloomberg and the Fed the total value of US cash holdings, bank deposits and money market funds exceeds $8.84 trillion. This amounts to 74% of the entire market cap of U.S. securities and the highest ratio since1990. The current cash-to-market-cap ratio has not reached historical extremes. in 1974 it was 121%. To prevent the current ratio from reaching this figure or even higher , cash positions would have to rise even more or stocks fall even further or some combination thereof. Either alternative is undesirable
another applicable statistic-- Consumer borrowing fell by $8 billion in November, the Federal Reserve reported . That’s an annual rate of 3.7%, the biggest since 1998, three times larger than October’s contraction and far from the unchanged levels the Street anticipated. In dollar terms, November’s $8 billion decline is the largest since the Fed started keeping track in 1943.
Still, total U.S. consumer debt outstanding still dwarfs that of any society in human history. U.S. consumers collectively owe over $2.5 trillion, not including mortgages. That’s 18% of the annual GDP of the nation. {DON'T UNDERESTIMATE THE CONSUMER'S INNATE INTELLIGENCE TO ADJUST TO CRISIS-- LET'S HOPE THE INCOMING ADMINISTRATION CAN DO LIKEWISE]
Very good post. All good and valid points. I would only add to your derivatives suggestion that all Credit Default Swaps be limited to the actual couterparties involved in owning and insuring the actual debt instrument. Speculation in these side bets on corporate debt defaults must be declared illegal ASAP by the new incoming administration House and Senate. (There is $1 trillion bet at present on GM going under within 1-5 years!) Either this or the State of New York must lower the boom on Wall Street about these practices by requiring "insurance" reserves by the "insurance" sellers. That will end this real cause of global instability very fast. This whole crisis is about the Credit Default Swaps financial nuclear weapons. It is not about the $300 billion in bad mortgages. Trillions of dollars of liquidity was pre-positioned into the system by Paulson because of the CDS WMD's not the mortgage crisis. The CDS's are financial AIDS and no one knows who is infected because of zero transparency about who has them, the nature of each contractual agreement, and the extent of each bank and hedge funds exposure. The CDS exposures took down Lehman, AIG, and all the rest. The MSM doesn't seem to connect Paulson's actions with this simple truth in the public mind. The whole crisis is as simple as that. When Lehman went down it made it an international crisis. If these instruments are not defused, we will all be Iceland in due time. Therefore, they have to be defused. Send Summers, Rubin, and Geithner in in lead suits starting the day after the Inauguration. One false move and they will all hemorrhage from every pore in their bodies in the financial plutonium they helped create.
On Jan 12 12:59 PM Heyjose01915 wrote:
> Sometime we all think better metaphorically than in real terms-
> Regarding the fiscal stimulus to the individual --" you can lead
> a horse to water but you can't make him drink" [ I wonder if this
> saying was composed by a bright economist?]
And of course I hope that both physicists and economists will forgive me this definitely unholy comparison and its related analogies.
Max12345