Last Friday the United States Congress rejected the $14 billion auto bailout.
That’s bad for the manufacturers and employees. It’s good for taxpayers and free markets. Seeing as the US is so far in debt it doesn’t really make much difference.
$14 billion on top of $10 trillion would have only added 0.14% to the US national debt. You almost think they should have just done it. They’re doomed anyway.
But for the Americans it is just the beginning. We read in The Guardian that President-elect Barack Obama has his pen poised ready to sign off on billions of dollars worth of infrastructure spending.
We hear that he is practising his signature as we write. It sounds as though as soon as he is sworn in he’ll be whisked off to sit at a table in the White House Rose Garden for the historic ’signing of stimulus package’ ceremony.
Unfortunately, it isn’t just in the US that stimulus packages are being touted. As seems to be the way of the world recently, other governments are trying to stimulate themselves and their economies.
Our own K. Rudd has got in on the act. News Ltd tells us “Kevin Rudd gives billions more to save jobs.”
Hallelujah to Kevin. Sound the trumpets. Prostrate oneself on the ground. Thanks for saving us Kevin.
So, where will all this taxpayer money be spent? I’ll get to that shortly. But first, what is a stimulus package?
It appears the idea of these stimuli is to “get the economy moving again” and other such noble reasons. It seems as though all that is required to prevent house prices falling, inflation rising and debt from being defaulted on, is to create a “national building plan.”
More trumpets please.
Back to News Ltd again for the details. “The package totals $4.7 billion and includes more than $1 billion for new rail projects and another $1 billion for universities and TAFEs.”
Er, ok. We aren’t quite sure how that will stimulate anything, let alone an economy.
What else have you got for us Kev?
“Another $711 million in funding for road projects will be accelerated.”
We said trumpets not kazoos.
If the idea was for this spending to have a positive impact on the economy, they may as well have just burnt the cash. At least that would be less effort.
The basic facts are the belief that government spending all this money to improve the economy is deeply flawed.
For a start, the plan claims that it will create 32,000 jobs. Will it? No, of course it won’t. It may employ 32,000 people to do the work, but where will those people come from?
Will they really all be people that are currently unemployed? Will that be the qualification for getting a job on these projects? Of course not.
The road building will be handled by a construction company that may have to employ some new staff, but if they are like most building companies they will just rotate employees from other projects as required.
Alternatively, some workers being employed on these projects may leave other employment. Will their ex-employer replace them with someone else? Probably not, they will most likely wait until the economy shows sign of recovery.
So, the fact is the national building plan will not create 32,000 jobs at all. In fact it will probably create closer to zero new jobs than 32,000.
Plus, what economic benefit will these new projects provide? Take the university and TAFE funding. How is that going to help the economy?
Building new roads. How does that help? The fact is that government has a very poor record when it comes to building projects. It will typically overspend and be overdue.
The fact is that none of the stimulus packages will actually provide any benefits except to the ego of the politicians providing them.
They may see it as politically unpalatable, but the fact is, if you are prepared to except an economy that goes ‘boom’ you must be prepared to except one that goes ‘kaboom.’ That is what we have at the moment. Left to run its course the economy will be purged of the ills that caused the boom and will emerge stronger.
However, with all the meddling that is happening we can expect the ‘kaboom’ times to last longer than it otherwise would.
The Secret World of a Wall Street Legend Exposed
It is being labelled as the biggest Ponzi scheme the world has ever seen.
What is a Ponzi scheme? A Ponzi scheme is a simple yet illegal way to pay out early investors with money deposited by later investors. That’s how they can guarantee high ‘returns.’
Investor A puts in $100 million. Investor B puts in $100 million a year later. $10 million of investor B’s money is used to pay investor A, giving him a 10% return.
Investor C puts in $100 million. $20 million is used to top up investor B’s account plus extra to give him a 10% return.
You can see how easily it can get out of control. Yet as long as new investors are prepared to invest then the scheme will ‘work.’ And who wouldn’t be prepared to recommend Mr. Madoff to their friends? After all he’s returning 10% a year.
Why have I used such large numbers to illustrate the point? Well, unlike what we saw here with Chartwell, where most of the investors were relatively small, the clients of Mr. Madoff were big. Very big – Hedge funds, institutional investors, ultra-wealthy individuals.
So big that it is estimated total losses in the scheme will exceed USD$50 billion.
Take a look at the list on Wikipedia of some of the firms that have been duped. It includes the likes of BNP Paribas, Banco Santander and Nomura Holdings.
The best bit about this story is Mr. Madoff’s pedigree. He is an ex chief of the NASDAQ market. Looks like a remnant of the dot-com years has come to bite the market on the backside again.
Is there any chance of this happening here?
As mentioned before, it already has on a smaller scale. But you could argue it has happened on a larger scale too. The infrastructure funds that have gone pear-shaped recently can be viewed as a type of Ponzi scheme.
The infrastructure funds were borrowing against future cash flows in order to pay current investors. That isn’t a million miles away from how a Ponzi operates.
The unfortunate part of the Australian experience was that most investors were small retail investors who had been lied to by planners and investment bankers who claimed that these funds would offer secure and reliable income (plus growth!) into retirement.
Cheers.
Kris