The View From 1776

Government Stimulus Spending: Differing Perspectives

President Franklin Roosevelt, speaking of the intractable Depression, sourly admitted that Keynesian fiscal policy, in theory, was the simplest thing in the world, but in practice, a disaster.

Posted by .(JavaScript must be enabled to view this email address) on 08/21 at 10:59 PM
  1. Whether Keynesian economic theory works in inventory recessions like all were since WW II can possibly be debated (though I don't believe they work the way the parties thought they did even in those), we are not in an inventory recession.

    We are in a credit depression caused by too much personal, corporate, city, and state debt. The Federal debt, until the massive attempts to save the nation from a credit depression, wasn't that large a portion GDP.

    Until the consumer, corporations, cities and states gets debt under control, government spending can't do anything but add more debt that is already to high to tax or grow out of according to testimony and reports to Congress over the years.

    Look at the "success" of "cash for clunkers." It has spurred production, return of auto workers to replace inventory being depleted by the program. Even some on the right say "it worked." Yet, the auto companies are now preparing for lower sales and cut backs next year after the inventory is replaced because their studies indicate this only gave a temporary bump and in most cases moved a sale up that would have happened anyway later.

    It also, reduced the number of washers and dryers sold, and it has increased the debt load for millions at a time when we need them cutting debt and returning to sound financial planning.

    To save auto jobs, they sacrificed other jobs and you end up with the government again deciding who will get bailed out and who will be allowed to fail. As stated, it may not have even saved the auto jobs if the auto companies are right about next year.

    Massive spending on some projects doesn't put the consumer back in the hair salon or Radio Shack or the local steakhouse if those in the construction business are saving and paying down debt and not increasing the velocity of money in a society.

    The bad news is that while Keynesian doesn't work, Austrian economics is only good to prevent, not repair a depression caused by too much credit expansion.

    It is the saving and return of the consumer, corporations, cities and states, that causes the depression. It is their reduced use of the mom and pop stores, as well as the large companies that causes the depression. It is their frugality and change in thinking about debt that causes the depression and Austrian economics uses those things to prevent credit depressions but it can't repair them. That takes time and a lot of it.

    We have used Keynes and as a result, went from $1 debt to $1 GDP growth in 1968 to $5-6 in the late Clinton or early Bush years for each $1 of GDP growth.

    In other words there was no growth in the "real economy" that wasn't being caused by more debt. Now, no matter how much we borrow, we only get the mathematical illusion of growth due to government spending that exceeds any possible collection of tax revenues.

    Austrian economics did warn of that cycle and the final outcome but, Austrian economics can't stop that cycle without causing a long period of correction in the consumer or whatever part of the society embarked on credit expansion for growth, whether a person or a city.

    So, while Keynesian is delaying at best, as it has in all the recessions since WW II, it is also making the coming collapse even worse. As more and more nations see that the dollar is doomed, they are moving more rapidly to find ways out of the dollar.

    The dollar can collapse and cause hyper-inflation (printing too much money) even in a depression as we saw in many nations over the last 100 years. While Germany is the most familiar and Zimbabwe the most recent, there are several other nations that have made the same mistake of using more debt than can be supported in the long run for growth.
    Posted by JanPBurr  on  08/22  at  02:01 AM
  2. quote
    The many parallels between 1924 Germany and present-day United States are cause for concern. Though the U.S. has not yet reached the depths to which Germany descended in that era, few can look at the constant depreciation of the dollar since the early 1970's and fail to be alarmed. It seems contemporary America differs from 1924 Germany only in the duration between cause and effect. While the German experience was compressed over a few short years, the effects of the American inflation have been more drawn out.

    In my view, this has occurred for two good reasons:

    First, American central bankers have learned enough from the German experience to delay and extend the consequences of printing too much fiat money.

    Second, Germany was a small state isolated from the rest of the world, a pariah nation of sorts following World War I. As a result, it had a difficult time finding a market for its government bonds. German deficits had to be financed internally -- a difficulty which greatly accelerated the printing of fiat currency.

    Up until recently, the United States enjoyed a strong world-wide demand for its government paper.

    While Austrian economics is based on common sense and human nature, Keynesian and all its variables is dependent on government manipulating human nature and the economy during corrections that would rid the system of bad things.

    Both parties are guilty of this. Both parties only use cabinet members and advisers to the President and Congress who espouse economic policy that defies human nature. Thousands of years of history are laid aside by men who think they are too smart to fall into the same traps and yet, they do.

    The Federal Reserve was established to end the very things it causes. Since its creation we have had about a dozen recessions, three banking crisis, two depressions and the devaluation of the dollar by 95% and yet, both parties are considering giving it more power.

    That is the insanity that prevails in group think like we have had for decades.
    Posted by JanPBurr  on  08/22  at  02:07 AM
  3. Jan,

    So far, at least, we do not seem to be suffering the horrendous levels of inflation (a la Germany) you have predicted. Would you care to give us your best estimate as to when the hyper-inflation will kick in?
    Posted by .(JavaScript must be enabled to view this email address)  on  08/24  at  04:24 PM
  4. The estimates I am hearing are everywhere from months to 5 years. Nobody knows for sure because the event that actually triggers it may well be accidental according to a study done to try and determine what the trigger would be.

    We also don't know how much support and for how long the other bank in the international banking cartel can and will provide.

    For example, it is believed the $500 billion currency swap we did with the 14 central banks Bernanke covered in testimony took what they got and bought our bonds so it wouldn't look like we were monetizing our debt. We may have bought their bonds to keep them from appearing to monetize as much debt.

    Then you have the banks borrowing at zero and then buying bonds with the money they borrow. How long the games can continue is anyone's guess.

    I personally think it will be when we just can't borrow enough even with the games and foreign lenders say they won't buy anymore, even if they don't sell.

    Since they have moved a lot debt to short term they can just stop buying and let the debt they hold mature. They don't have to sell it.

    In the previous inflation bouts, it was internal velocity of money and the money multiplier that played the key role. This time it will probably be the external velocity of money that determines it as dollars are used globally to buy commodities.

    For example, we may have food shortages soon due to massive crop problems around the world. Much of those sales are in dollars. As nations would start buying more with dollars, it would drive up the prices in dollars and if there is a global recovery going on then add copper, iron, tin, oil, and other commodities.

    With all the moves away from the dollar going on, that means that as soon as somebody does take dollars, they will want to get rid of them buying with those dollars as soon as they can. That would drive up prices on everything we consume here that involves raw materials, food or imported goods.

    At some point, "high inflation" triggers "hyper-inflation" and then we are really in trouble as many nations would simply stop accepting dollars no matter how many are offered.

    During that entire time, we could be in a deep depression with no significant velocity of money here, high unemployment, and low demand.

    There are too many variables to know for sure whether it is this fall or next fall as Jim Rogers is calling for, or 5 to 10 years as Marc Faber is calling for. We only know where we are going, not how long it will take to get there.

    My personal feeling is less than 2 years at the rate we are running up deficits at the same time tax revenues are falling. Also, that time is based on how many nations are making non-dollar trade agreements to avoid getting more dollars they don't want. Yet, at the same time, they are still selling to us and getting dollars or selling raw materials in dollars until they find a way to stop using dollars.

    PIMCO is the biggest manager of bond funds in the world. It says the greenback is going to lose its status and lose its value.

    Posted by JanPBurr  on  08/24  at  05:31 PM
  5. Jan,
    Thanks for your thoughts, although they are certainly pessimistic.

    Since the dollar is so widely held, it seems to me that moving out of dollars into another currency may be a fruitless exercise. If the dollar explodes, would it not take every other currency with it- and generate world wide hyper-inflation?

    When the Deutchmark inflated, it was not the major world currency, so other currencies could disengage and not be pulled down with it.
    Posted by .(JavaScript must be enabled to view this email address)  on  08/25  at  09:40 AM
  6. That is why the nations are trying to make subtle moves that don't collapse the dollar as they shed it.

    Brazil has made a deal with Argentina to stop using dollars and 4 other S.A. nations will join that move.

    China has made about 5 or 6 deals (Malaysia, Brazil, Argentina, and some others) to stop using the dollar.

    Brazil, Russia, India, and Brazil used some of the dollars they have to buy IMF bonds instead of U.S. bonds to support SDR's as a substitute currency. IMF has said they will start using other currencies for loans instead of just dollars as before.

    The other main move is out of long term debt into short term debt that can be allowed to just mature and thus, they won't have to sell on the market at a loss.

    Again, we can't tell how long those moves can be made before it starts a real erosion of the dollar.

    I think a lot depends on whether there is global recovery going on or if it is just an illusion. The more they can trade with each other and not use dollars, the quicker the dollar gets into trouble.

    At some point the loss is less to stop using the dollar than to keep using a currency losing buying power. The dollar has dropped in value 75% since Nixon took it totally off gold, internationally.

    The main risk to the dollar is that we can't grow or tax out of our problems. We either cut spending massively and crash our economy totally or keep increasing debt until there isn't any way to borrow what we are spending.

    Interest on public debt, within 10 years, according to the CBO will consume all corporate and individual tax revenues. We are now borrowing to make up shortfalls in Medicare and will be starting to do that with Social Security later this year or next.

    In other words, we are reaching the point where we can't fund anything we are doing fully. We doubled debt in 8 years under Bush and now will double it in the next 8 years or so according to the President's estimates.

    Interestingly, he just upped his deficit estimate while the CBO downgraded theirs. They basically flipped positions. However, both are still 7-9 trillion and probably way optimistic.

    The other factor is that we just don't have the economy to keep this going too much longer. When we were the major buyer of everything, it made sense to use the dollar. Now that the emerging markets are the major buyers, it doesn't make sense to use a currency losing value steadily.

    To strengthen the dollar would mean raising interest rates and that would totally destroy our chances at recovery and keep housing in the toilet for a decade or more. This was something that had to be prevented because it can't be fixed and only delayed for just so long.
    Posted by JanPBurr  on  08/25  at  10:23 AM
  7. quote
    Yesterday came word that the US deficit for 2009 might come in lower than expected. Instead of borrowing $1.8 trillion as anticipated, the feds might only borrow $1.58 trillion. Well, that still leaves them about $680 billion short
    Posted by JanPBurr  on  08/25  at  10:29 AM
  8. Speaking of getting hurt.

    I have $1,000 in a revenue stream that comes in from something I sold and financed for the buyer. If my forecast is right, at some point, that $1,000 a month income may not be enough to even buy the food I need.

    I will have basically lost the money I lent even though I keep getting the payments. I get the money but it doesn't buy nearly close to what it does now.

    This is the only way (inflation) that a nation that refuses to cut spending, can deal with rising debt that it can't pay off and that interest on the that debt rises every year.

    I offered to take a reduced amount if the person I made the deal with would pay it off early but, they weren't able to because of their own economic problems. Had I been able to do that, I could have made up for the reduction with investments in non-dollar ways.

    Millions of Americans are going to be destroyed financially by what is going on.
    Posted by JanPBurr  on  08/25  at  10:47 AM
  9. I should add that I don't try to time this even though I have "feelings" about it coming within 2 years.

    For example, I have done well in this rally because I invest based on what is going on now, not what will happen so much. I have some gold and silver as insurance but, I look at all things and what they are doing "now."

    Knowing where we are headed doesn't mean you can time it. We have known we were headed for a collapse for decades and over and over, people have said each recession would be "it" and they were wrong.

    There are thousands of variables at play and major forces in the world at work trying to keep the dollar from collapse and to create another debt based recovery. They could succeed in delaying it again and thus, to invest as if they can't could lose you a lot of money. At the same time you have to have contingency plans to deal with what happens if they can't delay it again.
    Posted by JanPBurr  on  08/25  at  02:15 PM
Commenting is not available in this channel entry.