Why the Stimulus Plan Won't Work

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Includes: DIA, SPY
by: John Whitehall

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.