Stimulus Spending Resulting in an Economic Recovery is Nothing More Than a Mirage

“THE good news is that the American Recovery and Reinvestment Act, aka the Obama stimulus plan, is working just about the way textbook macro-economics said it would. But that’s also the bad news – because the same textbook analysis says that the stimulus was far too small given the scale of America’s economic problems.”

That’s some mainstream economic analysis for you from economic public enemy number 1 – Paul Krugman…

Sorry, I should say, Nobel Prize winning economic public enemy number 1.

We’re not sure what textbooks he’s been reading, but if we were in favour of book burning – which we aren’t – then those textbooks would be the first we’d put on the bonfire.

Which is perfect timing considering the number of bonfires that will be lit across the UK tomorrow for Guy Fawkes Night.

But actually, we’ll give him a break. Because we agree with the first part of his statement.

It’s just that his analysis and conclusion are wrong.

The text books we’ve read have also predicted how the stimulus programmes would work out.

That an increase in government spending would bring forward many purchases, it would appear to ‘create’ some jobs and it result in the impression of an improved economy.

The difference is that Krugman and his Keynesian crony chums all believe that their plan of economic manipulation would result in a positive outcome. In their closeted world, there is no longer light at the end of the tunnel, they believe they are standing bolt upright in bright sunshine.

The reality is that they’re barely half way through the dark tunnel. It’s just that they’re standing under a 40-watt light bulb that’s about to pop.

You see, all this stimulus spending that has supposedly resulted in an economic recovery is nothing more than a mirage. It’s part of the ‘Delayed Depression’ that we’ve written about before.

Government by its very existence isn’t capable of genuinely stimulating an economy.

It isn’t possible. Sure, it may appear as though it has stimulated something. It may look as though it has ‘created’ jobs, or prevented a recession. But it hasn’t and it can’t.

All a government stimulus can do is to rob money from somewhere else in order to provide a temporary boost to selected areas of the economy. In the case of Australia this has largely been to the building industry.

But guess what? Even a six year old can figure out if you give something to someone you have to take something from someone else.

It’s impossible to give something away without someone else losing out.

Whether the ‘gift’ is taken from others by way of taxes, or whether it’s taken away from others through debt obligations or an increase in inflation, the result is the same.

And ultimately, even those that have won out now will be losers like everyone else in the long run.

Krugman’s argument is that more should have been done. That the government should have raped the taxpayer and the saver for even more money. Doubtless he would have the same advice for Australian policy makers.

In fact, given the more modest size of the Australian bail-out Krugman would argue for even more government spending.

Imagine how much the economy would have grown if the government had doubled the size of the stimulus package!

But once the stimulus spending has finished, that’s when it’ll be payback time.

That’s right, clowns like Krugman seem to have forgotten that all this spending has to be paid for by someone. And it will either be paid for through higher taxes, debt default or inflation.

The argument from the Keynesian cronies is that now the economy has recovered, business will bloom again and the increased tax revenue will enable the debts to be repaid.

That’s a nice and neat theory. The sort of theory the lightweights in the mainstream press can easily get their head around. And the sort of theory that fits in nicely with the mainstream economists at the banks.

The banks that need that story to be believed so more people can borrow more money than ever before.

The trouble is, they forget the ‘recovery’ isn’t real. When the stimulus dollars stop flowing, the business cash registers will stop ringing and the profits will slump.

In their own way the government knows this. So we’ll give Treasurer Wayne Swan some credit for that. He’s quoted as telling ABC Radio yesterday:

“The economy is still operating substantially below capacity and because of that we decided it was appropriate to continue with our stimulus, albeit withdrawn, as we go through next year.”

Except there will be nothing ‘withdrawn’ about it. The spending will continue for as long as they can get away with. And of course, the longer the spending continues the bigger the consequences will be.

The fatal error among the mainstream economists is to believe that the government won’t allow the economy to fail. It’s as though the all-powerful pen pushers in Canberra have a magic wand to prevent this from happening.

In fact, all they can do is postpone the inevitable economic collapse.

But all that aside, the question you want answering is “When will that happen?”

Well, we’re not big on making time specific predictions on economic collapses. There are too many variables.

Also we’ve seen what’s happened to Professor Steve Keen and his housing collapse prediction. But I’ll leave further analysis of the coming housing collapse until tomorrow… or maybe the next day. We’ll see how we go.

So, like the coming housing collapse, we can’t put a precise date on it. Odds are that for Australia anyway, the housing and economic collapse will be a simultaneous event.

The important factor is not so much when it will happen, but whether you’re prepared for it.

In our own small way I’m doing that for subscribers to Australian Small Cap Investigator and Australian Wealth Gameplan. Using strategies that can make gains from short term market moves, while still having a strategy for the longer term.

That means buying into economically sensitive stocks when they look cheap – as we did with McPherson’s Ltd [ASX: MCP] and Mitchell Communications Group [ASX: MCU] earlier this year, and then telling subscribers to sell them last week for a 361% and 150% gain respectively.

But on the other side there’s also the ‘big picture’ stocks such as the gas plays you’ve read about and the speculative ‘hard asset’ stocks we’ve recently looked at – the boost to the gold and silver price today is certainly helping those stocks.

Carping from the sidelines is easy. Anyone can do that. But coming up with a strategy to take advantage of bad economic policy is something else.

So far we’re ahead of the pack and I believe it will stay that way.

One thing is for sure, if you’re building your portfolio with banking stocks and basing it on comments from the economic cheer squad led by the likes of Michael Pascoe at The Age that’s one sure-fire way of doing your dough.

But whether you follow our advice here or in Australian Small Cap Investigator or Australian Wealth Gameplan, the most important thing you can remember is not to be fooled by the nonsense stories about the economic recovery.

There is no economic recovery, it is simply a mirage. And like all mirages, the more you believe it exists the bigger the disappointment when it disappears.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 closed down yesterday to 4,531.50 by 8.9 points. Trading was low due to the Melbourne Cup race, and most traders waited to see how the RBA decision would affect the markets.

Overnight on Wall Street the Dow Jones Industrial Average was down slightly by 17 points, to 9,771.91. The Dow closed down as a result of investors still unsure about the economic climate, and Warren Buffett’s purchase of the Burlington Northern Santa Fe Corp [NYSE: BNI] didn’t push it any higher.

In Europe the FTSE100 managed to finish at 5,037.21, down by 1.32%. The Footsie, however, did reach a low of 4,985 during trade, falling through the 5,000 mark for the first time in a month.

The Nikkei has continued its losing streak, closing yesterday at a three week low, to 9,802.95, down 231 points or 2.31%

The price of gold has hit record highs as a result of the Reserve Bank of India (RBI) decided to buy 200 tonnes of bullion.

The price of gold in Australian dollars is trading at $1,200.43, while in US Dollars it is trading at $1,084.46, an increase of $30 US dollars. And the price of silver in Aussie dollars is $19.06 and in US Dollars it is $17.22.

The Aussie dollar gained a little versus the US dollar, pushing back over the 90 cent mark, trading at USD$0.9035, and improved slightly against the Japanese Yen JPY81.58.

Crude oil closed overnight at USD$79.41

For the biggest movers on the market yesterday click here…

Stimulus Spending Resulting in an Economic Recovery is Nothing More Than a Mirage, 9.4 out of 10 based on 11 ratings

Tagged as: ABC Radio, American Recovery and Reinvestment Act, australian small cap investigator, Australian Wealth Gameplan, delayed depression, economic analysis, economic recovery, government spending, Keynesian, macro-economics, mainstream press, Michael Pascoe, Nobel Prize, obama, Paul Krugman, Steve Keen, stimulus, Wayne Swan