Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

No Amount of Economic Stimulus Will Work

Economics / Economic Stimulus Jul 06, 2009 - 06:01 PM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleEconomist Paul Krugman is back at it, whining for more stimulus. If you can stomach it, please consider What didn’t the vice president know?


But never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.

The above is not much more that an "I told you so" referback to Stimulus arithmetic (wonkish but important).

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.” Let’s hope I’ve got this wrong.

Krugman Wrong Again

Well Krugman did get it wrong. On many counts. For starters, the unemployment rate is headed to something like 11%, not 9%. At the time, I called for 9.8% by August. We are at 9.5% as of June. Please note that "no one could possibly have foreseen that" even though all I did was project the then current situation forward by 6 months.

Krugman says "Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond."

It seems to me that if fiscal stimulus takes time, it cannot do much good now no matter how big the stimulus is. More importantly, if fiscal stimulus takes time (assuming one believes it accomplishes anything at all), then what is the case for more stimulus now? Perhaps it just hasn't worked yet.

Krugman falls back on his wonkish formulas about multipliers and how fast they work. The truth is the real world does not give a damn about what economists think multipliers should be, or for that matter how any economic formulas are supposed to work in theory.

Stimulus Plans Raise National Debt For Dubious Benefits Now

In the real world, artificial stimulus may not accomplish anything at all other than driving up national debt. That pretty much sums up what transpired in Japan.

Oh sure, if the government gives away enough money, government could easily cause hyperinflation, in theory. However, that would not create any economic activity that anyone wants. Nor will it be tried because it would destroy banks.

Moreover, all this talk of multipliers is nonsense. If government spends money in a manner that private industry would not, the multiplier is far less than 1, and perhaps even negative.

Case in point: There are numerous road construction and repaving operations where I live. The thing is, most of the roads did not even need repair. Money came in for roads, Obama said use it or lose it, so the roads were "fixed". Now what?

They can "fix" every road in the country that does not need fixing and as soon as the roads are fixed, we will be back at square one, in need of still more stimulus, with Krugman whining for still more.

There is an economic benefit for fixing roads that genuinely need fixing, however, all that does is push up the curve a bit. Then what?

Ludwig von Mises on the Endgame

Flashback February 2, 2006: Inflation: What the heck is it?

Ludwig von Mises describes the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

The FED should have been listening to Mises all along. Instead they have put their faith in "productivity miracles", "new paradigms", and their own hubris. Those actions have accomplished nothing other than delay the eventual day of reckoning.

No Amount of Stimulus Will Work

The problem with Keynesian clowns is they never look ahead to when the stimulus stops. By definition "stimulus must end" and as soon as it does, unless the stimulus created lasting new jobs, there will be nothing to show for it other than debt.

And interest must be paid on that debt. And that interest has to come to come from somewhere, either more taxes, or printing money and cheapening the dollar. That means there is a price to pay down the road for stimulus today. Keynesian clowns act as if there is no price down the road.

Since you cannot spend what you don't have (without long-term negative consequences), the key to a solid recovery comes from a buildup in savings, lower taxes, and letting consumers keep more of their money (as opposed to government deciding how and when it should be spent).

In short, no amount of artificial stimulus can possibly work because government cannot allocate capital in an efficient manner (repairing roads that do not need to be repaired is proof enough). This is something that academic wonks trapped in their ivory towers apparently will never understand.

Creating a better business climate, with less government waste, will work. However, the right plan will take time and patience, traits that Government bureaucrats and academic wonks both lack. Unfortunately, but not unexpectedly, we are moving in exactly the wrong direction as noted in Obama's "Cap and Trade" Energy Plan Will Cost Jobs.

There is a price to be paid for reckless expansion of credit and we are paying the price now. All artificial stimulus does is prolong the agony. The greater the stimulus, the greater the period of future agony, just as happened in Japan. Ironically Keynesian and Monetarist clowns shouted for more stimulus all the way, and they are doing so again now.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in