Government Stimulus Can Only Provide Short Term Boost to One Area of Economy

As each day passes your editor becomes more baffled.

Things which appear to be common sense to us are deemed to be extreme views by others.

When we argue against government intervention or government stimulus programmes we do so because it seems obvious they can’t work.

Without covering old ground, a government stimulus package can only ever provide a short term boost to one area of an economy. It can never be long lasting. And it will always involve robbing from one part of the economy to feed another.

And furthermore, the boost will inevitably be made in the wrong areas of the economy. It always leads to a misallocation of resources.

As I say, I won’t cover that old ground again today. It’s enough for you to know that I believe the millions of dollars spent on infrastructure projects by state and federal governments is a monumental waste of money.

But that’s not all that baffles us. It’s the idea that after spending billions of dollars bailing out businesses left, right and centre – which clearly hasn’t worked – policy makers have finally decided it’s because they didn’t do enough.

They’re following the advice of the economic charlatan Paul Krugman and his cronies with their “spend more” mantra.

They believe the only reason it hasn’t worked is because they should have spent more. Only in government does this theory seem to hold sway. Apply it to any other scenario and it’s proven as a hoax.

Yet even seemingly bright people believe that it’s different with government – borrowing and stealing from taxpayers and then spending it all is a good thing.

We’ve seen this idiocy play out overnight as the world’s two largest economies, the US and Japan announce a ratcheting up of stimulus spending plans.

The latest plan from US President Obama is laughable, but we’ll take a quick peek at what the Japanese have in store first…

According to the Wall Street Journal:

“In an effort to prevent a “double-dip” recession, Japan’s new government unveiled an emergency stimulus package worth $80 billion, but critics said it still needs to provide a clear vision for reviving a country plagued by nearly two decades of economic malaise.”

It hardly seems like much compared to the $700 billion the US used for the Troubled Asset Relief Program (TARP).

But even the critics can’t get it right. What’s this nonsense about the government needing to “provide a clear vision…”? Government’s don’t provide vision, they provide dark glasses.

Looking to the government’s for vision is like asking Stevie Wonder for vision advice.

Government vision is nothing more than just throwing money around in any old direction. They don’t have a clue, and none of it having the kind of impact they want it to.

All they end up doing is giving the cash to their favourite special interest groups, while the taxpayer always loses out.

The biggest advice this ‘critic’ could give the Japanese government is to stop messing about with its citizens’ money. Leave the economy alone and it’ll fix itself.

If Japan has proven anything, it’s that after twenty-plus years of meddling and billions of dollars wasted, government’s can never be successful at manipulating an economy for everyone’s benefit.

Which brings us to Obama.

The latest news on the US stimulus package just goes to prove that US dollars and cents are becoming more like the tokens or play money at the fair every day.

It’s not real money they’re using. They’re just debiting one account then crediting another. Creating money here (at the Fed for the banks), destroying it there (in US citizens’ pockets through inflation).

The story so far is that the TARP has been so successful – at covering things up! – that those insolvent US banks can now pay back around $200 billion to the government.

What does Obama plan on doing with the $200 billion?

Spend it of course.

Did you ever know a government that didn’t spend? The government borrowed money that it couldn’t afford, to bail out banks that almost destroyed the entire global economy, but now those banks are ‘better’ – thanks to accounting changes – the US government gets some of the money back.

Which it now plans to spend again.

And why wouldn’t it. With interest rates touching zero, and even below zero when adjusted for inflation, the government is spending free money.

Money which it got from the banks that it bailed out. Because not only are the banks repaying the $200 billion, but those same banks have been funding the government debt programme by buying up all the US treasury bonds.

That’s given the government free money. Are you still with me?

It’s the US equivalent of the Japanese zombie banks. That’s where Japanese companies held shares in each other, providing some sort of bizarre never ending circle of fake liquidity. Bank A owns shares in Bank B which owns shares in Bank C which owns shares in Banks A and B.

Money is being created and circulated all over the place but none of it is actually being invested or put to good use.

It’s the same in the US. The US government bailed out the US banks by borrowing money from the same US banks. It was those banks which bought US treasury bonds using their investor’s money.

It’s almost unfathomable. It’s simple yet complicated. It’s complicated yet simple.

Of course Obama does claim that some of the $200 billion will go towards deficit reduction.

But only some. There’s no fun or electoral bribes to be made by buying back government bonds. No one’s going to see the benefit of that.

You can’t imagine Obama on the hustings in a couple of years saying: “This government paid off $10 billion of debt to reduce our debt levels by 0.1%.” [Cue fanfare!]

No, there’s much more to be gained by spending billions on “creating jobs.”

Even though the very existence of government ensures jobs are destroyed not created.

But closer to home, Australia has its own problems. Yep, don’t fall for the hype about business confidence and rising interest rates means a booming economy.

Because it doesn’t.

It merely means the stimulus programmes have achieved their short term effect – of fooling everyone into believing the economy has dodged a bullet.

But to be honest, we don’t know which is worse, or whether it’s the same. Overseas governments are spending up big on behalf of their taxpayers, whereas here, much of the big spending is coming from taxpayers that have been suckered into leveraging themselves up again.

You’ve seen the numbers on mortgage levels being at an all time high, and that retailers are expecting a $39 billion debt fuelled Christmas splurge.

And don’t forget that Australia is only in better nick than other countries due to the stimulus spending by China.

The biggest mistake that anyone can make is to think the Chinese stimulus programme will be any better than the Japanese, US, UK or Australian stimulus programmes, because it won’t.

All stimulus spending is doomed to failure. Again, the Chinese stimulus only gives the appearance of working. If you believe that governments can stimulate and manipulate an economy for good, then you’d believe the Chinese are doing just fine.

But we know it can’t work. That’s been proven in Japan, it’s been proven in the US, and it’s even been proven here.

Odds are, the mainstream commentators won’t appreciate that until the massive Chinese stimulus programme is equally revealed as a failure.

You’ve seen the mess that deficit spending has caused in the US. You shouldn’t think that the Chinese are somehow different. They’re doing a lot of spending too.

For some reason many commentators claim that because the Chinese run an authoritarian regime as opposed to a democracy, they can force their citizens to do things and therefore they can guarantee the stimulus will be a success.

We’ve also heard the argument that you can spend your way out of debt. That’s a good one, it’s been argued by the same people.

The other furphy is that China is more of a capitalist country than many Western nations.

While that may be partially true in relative terms, China is still a command economy. It is most definitely not a free market economy – again like Western nations. It’s run by central planners who know just as much about running businesses as our bureaucrats in Canberra.

The fact is, that the massive size of the Chinese economy, the massive government controlled spending and the size of their stimulus programmes means the eventual collapse of the Chinese economy will cause a huge upheaval.

We’ve looked to exploit the boom in the Chinese economy during this year by tipping energy companies in Australian Small Cap Investigator. While there may still be further room for the Chinese economy to grow further, I believe you should definitely have one eye on the exit.

Because when it does fall over it won’t be a pretty sight.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished down yesterday to 4,670.60 down by five points. Thanks to the lead in from the US, the markets are already down this morning by 1.30%

The Dow Jones Industrial Average dropped 104 points or 1% to 10,285.97. The announcement of Greece’s recent credit downgrade to a BBB rating and the news of $3.65 billion loss of a Dubai developer added to the fear that the markets are a long way from recovery.

In the UK overnight, the FTSE was down by 87 points over night, to 5,223.13. The pre budget is to be announced today and many are expecting a ‘windfall tax’ to be introduced by finance minister Alistair Darling.

The Nikkei was down by 27 points to 10,140.47.

Gold was down overnight by over $20 an ounce. The strengthening US dollar saw investors dump the metal and return to the greenback.

The price of spot gold in Australian dollars is trading at $1,248.12, while in US Dollars it is trading at $1,128.19. The price of silver in Aussie dollars is $19.42 and in US Dollars it is $17.58.

The Aussie dollar versus the US dollar is trading at USD$0.9053, and against the Japanese Yen JPY80.06

Crude oil closed at USD$72.62, which is a two month low.

For the biggest movers on the market yesterday click here…

Government Stimulus Can Only Provide Short Term Boost to One Area of Economy, 7.9 out of 10 based on 15 ratings

Tagged as: economy, emergency stimulus, government stimulus, government stimulus package, obama, Paul Krugman, recession, TARP, taxpayer, Troubled Asset Relief Program