11/11/09 Beunos Aires, Argentina – The last few days have been so busy, we haven’t had any time to think. But, now things are settling down, so we’ve had a chance to put our thinking cap on.
What are we thinking about?
Well, of course, we’re trying to understand the basics… George Soros had the right idea: Find the story whose premise is false…and bet against it. What premise is false?
The major premise that almost everyone believes is that government economists can improve the workings of an otherwise free economy. That leads people to believe that the feds have pulled off a save…they’ve now got the economy well along on the road to recovery…the recovery is getting stronger as time goes by…and soon, the feds will begin to exit from their stimulus efforts.
The big question in most investors’ minds is this: how quickly will the feds exit? As long as they keep up their stimulus efforts, investors expect rising prices for everything but the dollar.
Those who think the feds will be able to exit quickly believe growth will come without too much inflation. Those who think the exit will come slowly expect higher rates of inflation.
Well, guess what? The whole premise is false. From top to bottom. From beginning to end. Even the air it breathes is tainted with the smell of fraud and self-delusion.
The theory behind the recovery concept is that government spending and stimulus from the Fed has a “multiplier” effect. That is, the feds spend…the money goes into the economy…and then, the private economy multiplies the spending by growth in consumption and investment of its own. If there were no multiplier effect the whole exercise would be a waste of time, because we know that government spending in itself is a cost to an economy, not a source of real wealth. Government spending, generally, is a drag on prosperity. The Soviet Union proved that. The question remains however, can extra government spending at critical moments “prime the pump” so that it is multiplied by the private sector?
Answer: no.
“Our new research,” writes economist Robert Barro in The Wall Street Journal, “shows no evidence of a Keynesian ‘multiplier’ effect…the available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise the GDP by less than the increase in government spending.”
Now, we turn to the current situation. Is there any evidence of growth beyond the government’s own stimulus efforts? From what we can see so far, again, the answer is ‘no.’
The premise of recovery/multipliers/growth/and exit is false. We want to bet against it. Tomorrow we’ll talk about how.
Real economists know that there are no secrets. You work hard. You invest carefully. You save your money. That’s the best you can do. There are no multipliers. There are no miracle cures. There are no easy exits from trouble.
That’s why the world has little use for honest economists; they tell you what you don’t want to hear. So, people turn to the phonies…the charlatans…the imposter economists who say “yes we can!”
Trouble is, they can’t.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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Great article. Feds answer to the problems – pile debt ontop of debt… Central planned economy doesn’t work – ask the soviet union
Bill,
overall, thanks for your Daily Reckoning … way the best writing I could find on the internet up to now … basically the same, but oh so different every day …
take today: only 500 words (if you leave out the first paragraph), explaining so crystal-clearly what is happening and what is going to happen … I’m so envious !
…
other subject: if you have the time, could you inform us about the progress with the green energy project on the ranch … ? I’m really interested how things are developing … I’m a bit sceptic myself, but it could all change by 1 successfull implementation …
thanks beforehand and best regards,
Bravo! An excellent summation!
So, if the artificial stimulus is going to fail, that means we are going to go back on the deflation trajectory?
But then they will do more stimulus…so that means we will get back on the reflation trade?
How do you invest when prices are subject to the whims of government interventions?
I keep waiting for the Dow to hit 2,000, as Bill promised it would earlier this year.
I’m still waiting.
Here’s an idea: promise every day that the world is coming to an end. If you do that for 40,000 years, eventually, you’ll be right.
That’s the Bill Bonner strategy as the Dow heads toward 11,000….
Hmmm-
On 3/16/09 Bill took down his crash alert flag and said that stocks might go up 30-50% and the Dow reach 10,000 before year end.
BTW – the world is ending in 2012 – haven’t you heard?
Hey Larry,
The DOW can go to 50,000 for all I care. What good is DJ 50,000 in worthless currency?
I believe Mr. Bonner said we would likely re-trace the phony bear market rally of the 1930s.
Larry is knee deep in “the sham” he thinks what hes told by people who doesn’t know, and wouldn’t even give him a drink of piss on his thirsty’est hour is true. He has some awkward faith in these people probably because they have a lot more of the stuff he thinks he wants. He is the guy stuck in the cave with all of us trying to convince us the shadows on the wall are really monsters and we should just reside in the cave until we die – I don’t know about you but im gonna get some sun a take a walk.