A Piece of the Stimuls Pie

Despite what you are most likely reading in the press, the folks getting bailout money are pretty sharp. They’re very good at gaming the system.

More about that in a minute. First, the Dow went nowhere yesterday. Gold fell $14 to $939. And Newsweek magazine announced, “The Recession is Over.” Newsweek hedged its bets; adding that the recovery won’t be a piece of cake.

Elsewhere in the news is word that the housing bust is over. The papers are reporting the first gain in housing prices in three years – based on the latest Case-Shiller numbers. Hallelujah…right?

Hold on. There’s too much statistical noise in the monthly figures. They just don’t mean anything. A better measure is the annual trend. The Federal Housing Finance Agency says its index for May registered the smallest drop in 10 months…but is still headed down. (More on why it is destined to continue going down…later in the week.)

Back to the stimulus and how it works…

An article in today’s International Herald Tribune tells the story of one area in Tennessee that has gotten stimulus money.

“The cash that salvaged a county,” says the headline. Perry County, southwest of Nashville, must be one of those places you don’t want to stop when you’re driving across the country. With 25% unemployment and no significant industry, it sounds dreadful – at least from an economic point of view. It might be a nice place to live – if you don’t have to work for a living.

So the county honchos figured the county needed a little stimulus. They managed to lay their hands on cash being passed out by the feds. It doesn’t seem to bother anyone that the money belongs to someone else. Nor does the fact that it is now being frittered away in a bunch of make-work projects that nobody wanted to pay for even when they had some money. Nor that the stimulus-assisted businesses of Perry County now have an unfair advantage over their honest competitors in other parts of the state.

The Armstrong Pie Company, for example, used taxpayers’ money to expand: “New workers [hired with stimulus money] have helped the company triple its pie production and expand its reach through central Tennessee.”

A quick question: what happened to the pie companies that lost market share to Armstrong? And another: how is the economy any better off by stimulating one pie company to make more pies at the expense of other pie companies? And a final one: even if total pie consumption goes up – a larger pie! – where’s the benefit?

The whole thing is a scam!

Talk about scams… Elliot Spitzer is back in the news. Speaking to MSNBC, the disgraced crime-fighter described the Fed as a “Ponzi scheme”:

“You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.

“The Fed needs to be examined carefully.”

Poor Spitzer resigned as governor of New York in March 2008. At the time, he had been warning about sub-prime mortgage loans. Some think the feds found a way to silence him – by revealing that he had a bad habit…$1,000-an-hour hookers.

Investigative reporters maintain that federal enforcement officials had the option of leaving Spitzer out of the news. Instead, the Bush Administration Justice Department decided to out Spitzer.

The former NY Attorney General had this to say about regulatory reform:

“Regulatory agencies already had the power to do everything they needed to do,” he said. “They just affirmatively chose not to do it.”

Stimulus is a scam – on both sides of the Atlantic.

In Europe the banks have a good hustle going – almost as good as in the United States. They borrow money from the European central bank and then lend it back to the government.

The ECB loans money at low rates to the banks – hoping to encourage consumer and business lending. In June, for example, the banks borrowed 442 billion euros at a fixed interest rate of 1%. But lending to business and households is at its lowest level since record-keeping began – and slowing down, says James Saft in the International Herald Tribune.

In May, Europe’s money supply grew at a 3.5% annual rate, he notes. But lending to the private sector in June slowed to 1.5% from 1.8% a month earlier. Loans to nonfinancial corporations actually fell in May, while lending to households grew at less than 1%.

If they didn’t lend the money out…what did they do with it? Well, they did lend it – back to the people they borrowed it from. In June the banks bought $75 billion worth of government bonds and lent nearly $30 billion directly to European governments.

Of course, the banks are doing well. They earn money without taking the risk of lending to the real economy. But what good does it do? None.

And here’s a letter from a Dear Reader:

“It is about five years since I first read the DR and agreed with your recommended ‘trade of the decade.’ At that time it was clear to anyone who saw the busts of 1974, 1991 and 2001 that the next one was imminent, even though politicians, ratings agencies, financial services and real estate company directors and mainstream financial journalists were all ‘asleep at the wheel.’

“But were they? Maybe they saw it too but it did not suit them to take measures to prepare for the bust. After all, those in positions of power and influence are using other peoples’ money to feed their ambitions and egos, and would probably have made very different calls had their own money been at risk on such a huge scale.

“Fortunately, with my conviction stiffened by your comments in the DR, I sold down all the holdings in my family property investment company in the UK between 2004 and 2007, repaying £18m of bank debt in the process. 50% of the proceeds went into gold and silver. We have not made any money in the last year but this strategy has resulted in no loss in the credit crunch…yet!

“So well done, Bill, on giving the baby boomer generation a lifeline in the form of sound common sense comment – and as you remind us, it is free!

“Keep up the good work. I still await Gold:Dow – 1:1 although I may not live that long!”

Ah, there’s the rub…we may not live long enough…

Surely the Dow will trade at a p/e below 8… And gold will trade at one times the Dow.

But when?

As we told the group in Vancouver, it will happen…but there could be a whole lot of depression before it happens. Depression could drive down gold prices…and discourage gold bulls. It could ruin stock portfolios…bankrupt pension and insurance funds…and put millions more people out of work.

We don’t doubt that the feds have the power to destroy the currency and create inflation. We doubt that they can do it in a controlled, gentle way. As the depression worsens and lingers…they’ll become more and more desperate to raise inflation rates. They buy more bonds. They increase the money supply. They’ll become more and more reckless as prices fail to reaction.

Then…inflation rates won’t go up gradually…they’ll go up all of a sudden…surprising almost everyone. Holders of dollar bonds – notably the Chinese and Japanese – will panic and sell. All Hell will break loose.

Will it happen in our lifetimes? Depends on how long we live…

Until tomorrow,

Bill Bonner
The Daily Reckoning