Tuesday, January 27, 2009

Why the "Stimulus" Won't Do a Damn Thing

This post will show how the proposed $825 billion "stimulus" package will do absolutely nothing to help the economy and will only serve to make the existing economic problems worse.

"But wait! How could that be?" you ask yourself. All the politicians and talking heads on TV are saying that it will boost the economy and create jobs! I'll let you in on a dirty little secret - most politicians and talking heads don't have a basic understanding of economics. I'll explain it to you as simply as I can so that you can be better informed than 99% of politicians and talking heads.

First: The proposed stimulus has a price tag of $825 billion. You can view the proposed stimulus by clicking here. Let's reduce that number, because it includes $275 billion in tax cuts. Government accounting is completely different from real world accounting, so they include a tax cut in the "cost" of budget bills. This simply means that we get to keep an additional $275 billion of our own dollars. The result? The actual new spending by the government is $550 billion. So, we've already reduced the "stimulus" spending by a third.

Second: Where does this new spending money come from? The US government raises money by selling Treasury bonds. These bonds are sold to the general public. It's basically the same as taking out a loan to increase your personal spending. These bonds require the government to pay interest to those who purchased the bonds. Therefore, the money the government will spend on the stimulus will in fact be money that it borrows from other people. So in effect, for every $1 that the government spends on this stimulus, $1 was diverted from other investments. In other words, no new money or growth is being produced. It's the same as borrowing a dollar from your neighbor and lending it to another neighbor. Nothing was added to the economy and no new investments were created. The money being spent on the stimulus is money that would have been invested someplace else anyways. 

Third: Instead of that "stimulus" money being spent by private sector employers, it will be spent by politicians and bureaucrats. The transfer of wealth from potential private sector investments to the Federal Government will do absolutely nothing to create new jobs. It's simply a transfer of money. In fact, it will likely result in fewer jobs because once bureaucrats and politicians gets their hands on the money, it will be severely whittled down by bureaucratic wrangling and government ineptitude. 

Bottom line - the stimulus will do absolutely nothing to "stimulate" the economy.

Oh, but there's more. That $550 billion that's being borrowed to increase federal spending carries with it a bill for interest that the federal government must pay from either the general budget or by borrowing more money! Guess what! The federal government already spent $412 billion on interest on the national debt, just last year! This new spending will add approximately $20 billion to that amount, each year.

This is a losing game folks. It's no different than taking out a loan to pay the interest on another loan. It will eventually collapse. It's the biggest Ponzi scheme in the history of the planet. It's piling borrowing on borrowing while adding nothing net new to the economy.

Excessive borrowing and leverage got the world into this economic crunch - more borrowing will not make it better.

Tuesday, January 20, 2009

US and UK Banks Insolvent

Do you know where your money is?

US and UK banks are insolvent.

The FDIC, which "insures" US bank deposits, has a insurance fund that with $34 billion in it. The FDIC "insures" $4.6 trillion in deposits. If just one big bank fails, FDIC is bankrupt.

Fractional reserve banking is coming home to roost.

Monday, January 19, 2009

What Happens When You Take Away the Corn?

There's an old parable about getting hooked on government handouts. I had heard this years ago, but it just popped in my mind again today. I searched the Internet and found one version of it.
A chemistry professor at a large college had some exchange students in the class. One day while the class was in the lab the Professor noticed one young man (exchange student) who kept rubbing his back, and stretching as if his back hurt. The professor asked the young man what was the matter. The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country's government and install a new communist government.

In the midst of his story he looked at the professor and asked a strange question. He asked, 'Do you know how to catch wild pigs?' The professor thought it was a joke and asked for the punch line. The young man said this was no joke. 'You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again.

You continue until you have all four sides of the fence up with a gate in the last side. The pigs, who are used to the free corn, start to come through the gate to eat; you slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught.

Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

The young man then told the professor that is exactly what he sees happening to America. The government keeps pushing us toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine, drugs, etc. While we continually lose our freedoms -- just a little at a time.

It's a good story by itself, explaining how government breeds dependence. But another thought popped into my mind as I thought about this story. What happens we you take away the corn? 

We're in the midst of the largest expansion of federal spending in the history of this nation, with over $8.5 trillion of federal government outlays and guarantees, just in the last four months. We have a national debt that has doubled under the Bush administration, to over $10.5 trillion. We have future unfunded liabilities, just at the federal level, of over $40 trillion. We have state and local governments that put taxpayers on the hook with unsustainable defined benefit pension plans that are just now beginning to collapse. 

The point is this: The American people have been fattened up by corn over the last several decades, with an acceleration over the last two decades of Federal Reserve-induced malinvestment orgies. First in technology, then in real estate. These malinvestment orgies led to expanded government spending and government promises, making more and more people dependent on government money (corn), one way or another. However, the math doesn't work in the long term. Something has to, and will, give.

We are seeing the first stages in a potential catastrophic collapse. We are in the midst of deflation. The Federal Reserve and politicians in Washington will do anything they can to prevent deflation. So they have cranked up the printing presses and are expanding the money supply at a truly unprecedented rate. We have collapsing banks, collapsing industry, a collapsing economy, a collapse in debt, and a collapse in consumption. Eventually, people (and, more importantly, foreign governments) will stop buying US Government bonds as they see that annual deficits of $2 trillion are unsustainable. Then what?

"Stimulus" plans will fail. Hoover/FDR stimulus plans in the 1930s only extended the length and depth of the depression. The Bush/Obama stimulus plans will do the same.

Folks, the government corn will run out when we all realize that nothing can be done to stop the natural correction of the economy.