It has been a while since I posted. The more and more I hear about stimulus packages the more frustrated I become. The American Recovery and Reinvestment bill passed by the house today contains around $275B in tax cuts and about $550B in so-called stimulus. Did you know that there is only $30B allocated for highway and bridge construction projects (pg 6). The items in this bill essentially cover every liberal agenda item from the past few decades including universal healthcare (pg 10). Don’t believe me? Read it for yourself (http://appropriations.house.gov/pdf/PressSummary01-21-09.pdf).
Training Primary Care Providers: $600 million to address shortages and prepare our country for universal healthcare by training primary healthcare providers including doctors, dentists, and nurses as well as helping pay medical school expenses for students who agree to practice in underserved communities through the National Health Service Corps.
This bill will not stimulate anything! It pours a LOT of money into pet projects that may or may not be effective. Our representatives seem to feel like they have a green light to spend, spend, spend. However, their logic is completely flawed. Let me explain myself a little on this one. If $1B is given to construction industry than approximately 30,000+ jobs are created (at least until the money is gone!). However, that money had to come from somewhere. It didn’t just magically poof into existence. Where does it come from? The rest of us taxpayers… who have to pay interest on it as well. The public is duped out of $1B+. Therefore, isn’t it logical to suppose that the public will consequently lose $1B worth of jobs to pay for it? I would argue that the effect is actually worse because jobs across the board are weakened at the expense of a single industry, the construction industry. Does that really sound like a good idea? Maybe it's good if you’re in construction, but the rest of us are screwed!
It’s time now to make some predictions about the future. I would appreciate any comments that you have. Maybe I’m just a little crazy, but it makes sense to me.
1) The American Recovery and Reinvestment bill will produce a short period of stock market gains as Wall Street anticipates some sort of revitalization, but revitalization will not happen.
2) More companies will announce lay offs. Losses will be higher than predicted. The stock market will drop even further than it is now.
3) The cycle will feed on itself (deflation) and lead to a long depression. The government will pass additional “stimulus packages.” Economies around the world will suffer because if we Americans can’t afford to buy their junk then who will?
4) If you think the national debt is bad now, just wait! As deflation sets in, the burden of debt increases. The Fed will have to print money just to stay solvent.
5) After a long period of time (1 – 2 years) the economy will start to turn around for real.
6) If you didn’t think things were bad before, this is where things get really scary. All that fiat money that has been printed / borrowed to “stimulate” the economy will be enter the system all at once because people and companies will have held onto it. People won’t be afraid to spend. They’ll invest in the stock market. Loans will be given. That’s what we want, right? The problem is that increased money supply can lead to only one thing… inflation. Bad inflation!
7) This is where I get off the prediction train because nobody can predict what happens at this point. There are two plausible scenarios that could play out. The more benign of the two is that we experience high (maybe double-digit) inflation until things balance out. The more likely scenario, in my opinion, is that this country will experience hyperinflation because of all the freshly printed money in the system in addition to the national debt. Right now we are past the point of ever being able to repay our debt. For all intents and purposes our nation is bankrupt now. More “stimulus” will just drive us to the brink faster.
8) Hyperinflation can be defined in many ways, but essentially means that the value of the dollar takes a nose-dive, falling essentially to zero. Here’s a practical example. If a loaf of bread costs $3 today, in a hyperinflationary scenario that same loaf of bread might cost $1000 or more because the dollar is worth less. Scary thought, huh? If we really end up like this I hope you have your food storage in order so that you don’t have to spend your life savings just to keep your family fed. A little gold might be nice too because your greenbacks may serve you better as toilet paper than currency.
Thoughts anybody?
Sounds like Glenn Beck!!
ReplyDeleteI'm having a late lunch today.
ReplyDeleteAre you a little crazy? Yes. Anyone who predicts the future is a little crazy. I will now proceed to predict the future (and comment on the past, viz your post).
The state of the economy (global and US) and current market conditions either signify an imminent and disastrous collapse of the world financial system or they signify the greatest ownership opportunity we will see in our lifetimes. My spectacles are rosier than yours on this one and I'm betting this is an abnormally great buying opportunity for stocks and other goods. The trick is that you have to have a job or money set aside that you can use to buy stuff right now.
I believe things could very well and probably will get worse before they get better. I believe your scenario of a 1-2 year turnaround time for the US economy sounds about right. And we're staring at a very painful two years.
I believe the cycle you outline has a possible point of divergence at number 6. I agree the Fed is going to be printing money right and left for the next little while to try to fill the massive crater left in the economy by insolvent banks. But rather than hoard and spend later because the money supply is so flooded, I think a lot of that money will just go away as it is used to clear CDOs and other toxic financial instruments from bank balance sheets. Only when the banks are actually solvent will they be willing to lend.
The Fed will probably overcorrect like it always does and will put too much money in circulation, so we will have fairly high inflation, but I think the hyperinflation scenario will be avoided. For the dollar to crater that bad, investors have to not just lose confidence in the U.S., but they have to find a better place to put the money. Where they gonna put it? Europe? China? India? South America? No way. I think the U.S. as an investment still has a fair amount of room to maneuver before it loses status as the best of a set of bad choices.
I do agree with you and Mitt that we need to rein in entitlement spending.
I don't agree with your analysis on job creation (i.e. spending 1B taxpayer cash = 1B of jobs to be lost somewhere else). The idea is that you're taking Joe sixpack off the couch and putting him to work by taking money from the savings of Melvin Sneedly of highfalutin' big bucks inc. By giving the money to Joe, you cause a lot of other money to be spent (construction company buys materials, Joe pays his medical bills so the hospital can reimburse my company and I can get paid, etc.) and once you get that dollar out of Melvin's savings account, it gets spent over and over generating economic growth activity. I don't remember if that's Keynes or Friedman, but I think it's Keynes. There's some empirical formula for it, like 1 dollar spent = 4 dollars of economic activity or something. I don't remember it exactly, but I believe in the general idea. Growth is fueled by spending, not saving.
My problem is that I'm a saver. I want everyone else to spend so my savings can reap the benefit of the growth fueled by their profligate spending. Alas.
I also don't agree that $600 million spent to pay off school loans for a few thousand primary care physicians constitutes universal health care. Even if our health care system doesn't change dramatically, we need more primary care docs. But I do heartily agree that such an appropriation (and many of the other similar appropriations) have absolutely no place in this bill. I believe that's why the GOP is standing up against it, and hope they continue to do so in the Senate.
I love that you think about these things. I wish we had the chance to talk more.
Here's hoping the world doesn't end tomorrow. Or at least that if it does, it ends in a way that makes me laugh.