Has the Stimulus Finally Run its Course?

Is this the morning after? Or Boxing Day? Or even the day after your birthday?

Well, if the stimulus programmes were the night out on the… town, Christmas Day and your birthday all rolled into one, then there is always going to be a big let down the day after.

Could this be it? Has the stimulus finally run its course?

Well, let’s take a look. But first a brief follow-up to the property saga.

We don’t think the Money Morning mailbag has ever seen as much action as it has over the last week or so.

Again we’ve received emails from both sides of the argument. And you can even read some comments from readers who have posted them to the Money Morning website.

You should post comments too if you’ve got something to say.

The good thing about being contrarian is you can even get people who agree with you to disagree.

“Your comments using apples and bananas are off. I’m starting to think you’re the one whose [sic] gone bananas!!!!”

That was from Money Morning reader Scott.

We even had some Latin quoted at us to emphasise that your editor is wrong about the property market.

Unfortunately, your editor’s Comprehensive School education only just managed to teach us English, let alone anything foreign, so we’ve been unable to understand what they’re on about.

Anyway, we’ll leave the property tomfoolery alone today. We’ll just finish the subject by saying, it’s simple, there’s no need to over-complicate it.

The property market will crash, it is impossible for it not to. No amount of statistics or economic theory or ratios or even Latin will prevent it from happening. And even 657,124 temporary migrants won’t keep prices propped up.

Until then we’re happy to read comments from the property bulls who seem to believe the Australian property market is the only asset in the world that can rise ad infinitum. [Ed note: we also know ad nauseum and ad hoc, but that's it I'm afraid].

But back to that other crash, the stimulus crash.

It was obvious – to keep the metaphor going – the party couldn’t last. Any form of spending by a government will only be wasteful, temporary, and create bigger problems for the economy.

But wait, what’s that we hear, “Governments should have spent more.”

Ah, of course. That argument was inevitable. It’s not that the stimulus has failed, it is that Governments didn’t go far enough. They should have spent more. They should have hocked their citizens even further into debt.

“In fact, we would be better off if governments were willing to run even larger deficits over the next year or two.”

That’s what Nobel Prize winning economist Paul Krugman had to say in an op-ed piece for the New York Times.

It seems PhDs and Nobel Prizes aren’t quite what they used to be.

But get this. Not only does he believe governments should run bigger deficits, he genuinely believes that “deficits saved the world.”

I’m not joking here reader. Click on the link above to the New York Times article and read it for yourself.

It’s one of the reasons why we probably shouldn’t be so harsh on the dumb and corrupt politicians in Canberra, Washington DC and Westminster. Because this is one of the guys they’re relying on for advice.

But, according to Krugman, don’t listen to all the doom-and-gloomers, because look at the numbers:

“The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.”

He goes on to say:

“The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P.”

Make no mistake, allowing a government to get into big debt in the name of its public will only lead to trouble.

Many mainstream economists claim government debt is tiny.

And usually they compare it to GDP to emphasise their point. They claim that comparing a country’s debt to GDP is just the same as comparing a household’s debt to income.

Oh, how wrong they are. It’s not even close.

For a start household debt is voluntary, whereas government debt is forced upon everyone, and everyone is forced to repay it through taxation.

If you wanted to compare a government debt to a household a much better comparison would be your neighbour taking out a loan to build an extension to his house and then telling you that not only is the loan in your name, but that you have to repay the debt.

Anyway, you’ve probably had enough analogies for one week…

One of the biggest problems with the whole stimulus – aside from the monumental waste of money – is that individuals and businesses have been unable to reap the benefits of a recession.

“What benefits?” I hear you cry.

The benefits of liquidation sales, of cheaper prices, of badly run companies being put out of business and allowing well-run companies to flourish.

Instead, the stimulus programmes have propped up areas of the economy that should have been allowed to die. And in addition, the stimulus programmes have helped to prop up prices too.

The only thing that’s gone down in price to become more attractive is debt.

No irony there of course. And if you believe Krugman and his cronies we need more debt because it is only debt that can, er, get us out of debt!

We won’t even try making sense of that one.

But hold on to your hats debt fans, because even the mainstream economists are now talking up the odds of an interest rate increase this year. Remember, not so long ago we were told the official cash rate could dip to 2%.

Now all the talk is about a rise of two percentage points by the end of next year. Perfect timing of course. Just after everyone has been induced into stocking up on debt for Christmas, the cost of servicing that debt is about to soar.

How much?

Well, a $300,000 home loan at 5.74% today costs $1,886 per month. Increase that to 7.74% and the monthly repayments go up by $400 per month.

Doesn’t sound much does it? Not if you’ve borrowed conservatively it doesn’t, but if you’re a first home-buyer who has been encouraged to jump into the market and has had to chase home prices higher, chances are you’re at your limit already.

But don’t worry, because we all know property prices always go up, you’ll easily be able to sell your home and relieve yourself of the debt burden.

And as a bonus, you’ll probably make a profit on the transaction as well!

Other Stuff on the Markets

The S&P/ASX200 slipped 0.23% yesterday, while overnight on Wall Street the Dow Jones Industrial Average dropped 47 points. In Europe the FTSE100 was closed for a bank holiday, and the CAC40 fell 1.07%.

The price of gold in Australian dollars is trading at $1,128.47, while in US Dollars it is trading at $952.88.

The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8422, and JPY78.58.

Crude oil closed overnight at USD$69.83.

For the biggest movers on the market yesterday click here…