Diary

Reasons to Abstain From Further Keynesian Stimulus. (Do it For the Children)

From the diaries by Erick

The Democratic Party floated a trial balloon earlier this month that ran into more anti-aircraft fire than Jimmy Doolittle encountered over Tokyo. Their proposals to enact Stimulus II caused predictable voices (such as moi) to recoil in bemused shock. What probably stunned the Obamanauts to the core, had to be the reaction of many of their economic cheerleaders.

Henry Blodgett, the Pro-Barack rhetorical equipoise at Clusterstock.com, wrote an autopsy entitled “How Obama Blew His Credibility on the Economy.” In it he accused Barack Obama of painting a artificially bright picture of the economy in order to pass a truck load of spending. Despite his ideological preferences, the man nailed it.

Slamming unremunerated spending does not suffice as a critique to refute the current administration’s default strategy to handle economic downturns. To truly comprehend why Keynesian Stimulus must be shunned, three things need to be explained. First, Keynesian Stimulus will not work in the current recession. Second, even if the stimulus revivified the credit markets, people would save it, not spend it.

Finally, to close the loop, we return again to the problems related to the financial costs of moving money forward. When money is borrowed, it has to be repaid with interest. This, in turn, restricts the economic fortunes of future Americans who pay the interest owed to clean up after today’s debacle.

We begin with an unlikely source of economic criticism towards large government spending. Former Clinton Economic Advisor, Robert Reich, does not actually announce that Speaker Pelosi should stop bringing large spending bills to the floor of the House. However, he does put forward a strong argument that suggests that this approach won’t fix the current problem. Reich makes his argument below.

In a recession this deep, recovery doesn’t depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from. They can’t borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water — owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can’t are hunkering down, as they must.

This badly undermines the case in favor of taxing to afford enhanced spending. Taxes ultimately come either directly or indirectly, from consumers. If the IRS taps me on the shoulder directly, my wallet gets empty. I can no longer buy as many things.

Taxing businesses does no better. Businesses react to tax increases in three ways. They produce less, they fire workers or they raise prices. If they produce less, I pay more per unit purchased because of supply and demand. If they fire workers, there is a finite probability that I could be one of them. Take one consumer out of Reich’s proposed recovery brigade. If they raise prices, the consequences are obvious, I demand less.

Thus, the microeconomic effect of taxation undermines the very consumer spending that Robert Reich has just posited as a necessary, if not sufficient condition for economic recovery. Yet, the Obomanomic Paradigm doesn’t die easily. Like the Black Knight in the Monty Python skit, it rises back up and demands still more “ ‘Tis a mere flesh wound!”

So, assuming a spendulus so grand, so vast, so wide that the money flows from every spigot, we now have to prove it still won’t work. This is where The Mighty Spengler unleashes the weapons-strength, worms-in-the-brain crazy.

It’s not about getting a recovery going. That’s not going to happen, not if Martians land in flying saucers with a billion tons of gold to invest in bank capital. It’s about preventing something worse than we have now, namely screaming, bug-eyed, blood-in-the-streets, rape-the-crops-and-burn-the-women panic. Zombie not bad. Zombie good. Zombie better than alternative, which is you dead. Really dead. No breath, never get live again. Zombie is as good as it gets. You zombie, you still alive, sort of. You not zombie, you dead. Opposite of zombie not happy, lively, active. Opposite of zombie is you push daisies up. The best we can get out of this is a zombie banking system, one that still pays its debts because it earns enough interest from the toxic assets left over from the last boom.

I’ve always hated the term “Zombie Bank.” Does it suck your brain out and charge you a $3.00 ATM fee? It’s a gross exaggeration, but Spengler does raise an interesting conundrum. These Banks of The Living Dead are subsisting on the interest payments from dodgy investments with a dubious future. A spendulus plan pumps trillions of unpaid-for loans into the economy.

This pours holy water on the undead banks in two ways. As their toxic assets default, these banks are forced to borrow more and more themselves. But wait a minute, they can’t, the government sucked up all the available credit to pay for Keynesian Stimulus. If we don’t do that, unemployment could get as high as 8.1% (sarcasm off). So the banks can’t get their hands on any liquidity.

Once the government has Hoover-Vaccd all the credit out of the economy, they then have to print their own money to pay for the interest. At that point, inflation kicks in. The banks then have to pay higher interest rates on savings with money that they don’t have in the first place. It’s a heck of a lot easier just to eviscerate all the zombies with a Ninja-Sword or a fragmentation grenade.

Of course, in the long run, consumers are the ones who really pay for this deficit. How, pray tell? No one will foreclose on the US. Only in a Bugs Bunny cartoon can Florida get sawed off and towed away.

John Maudline offers us his perspective of what will happen here in the near future.

The graph shows the US will need to issue $3 trillion in debt. ….All told, Hayman estimates that the world will need to find $5.3 trillion in NEW government financing.

Bottom line? There is simply not enough available capital under current conditions to do it all. Something has to give. More household savings? More foreign investment (flight to safety, as the rest of the world looks even worse)? Reduced corporate borrowing and thus less GDP growth? Higher rates to attract more foreign and US investment?

The combinations are infinite, but none of them bode well. Increased household savings means less consumer spending. To attract more foreign investment (in the amounts that will be needed) will mean higher rates. And this is 2009. What happens in 2010? And 2011?

So the bottom line is this. Keynesian Stimulus must be forsworn. It does not address the current problem. It would not be effective; even if it were on point for the type of recession we currently suffer from. Even assuming that it would work, the future year costs to amortize that stimulus would far outweigh the positive, ameliorative effects on current problems. Not only should we forego further Keynesian Stimulus for ourselves, we should do it for our children as well.