07/09/10 Paris, France – Paul Krugman, Martin Wolf and the other big spenders are remarkably resilient. And cunning. On their advice, the world’s governments put up as much as 4 years’ worth of the entire planet’s savings to bring about a ‘recovery.’ On the evidence of the last couple of weeks, it didn’t work.
In the world’s leading economy, 8 million jobs have been lost. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better. Still, fewer people have jobs now than when the stimulus began. Those workers with jobs earn less than they did then. And those who lose their jobs wait longer than ever to find a new one. Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. Illinois has stopped paying its bills. California is laying people off wholesale.
But instead of falling on their swords in shame, the economists behind the stimulus efforts are positioning themselves for an ‘I told you so,’ moment.
In our last installment, Britain and Euroland had just turned towards austerity. Alone among the Western nations, the United States of America pledged to stay the course, continuing its program of counter-cyclical stimulus. Then, last week, the US Senate rejected a measure to extend unemployment benefits. Suddenly, we’re all austerians now.
Krugman was quick to distance himself: “as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided.”
‘Spend now; cut later,’ is still his advice. But with so much spending…and so little to show for it…you’d think he’d be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending – even in time of private sector retrenching – makes people better off? And even if ‘spend now, cut later’ were good advice, is there any evidence that they can actually do it? None that we know of.
Based on the experience of the ’80s and ’90s, we observed last week that it didn’t seem to matter what governments did or what they said…the markets went about their business. Today, we add a further provocation.
Let us take a look back at the penultimate budget of the Clinton years:
“Eight years ago, our future was at risk,” Bill Clinton congratulated himself on Sept. 27, 2000. “Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion.”
The Clinton team claimed to have turned things around. They claimed credit for a budget surplus of $122 billion. This was the third surplus in a quartet…the only surpluses in US budget history after 1972. That year may be significant. Before then, the world did business in dollars backed by gold; if a nation spent too much, its gold would be called away to settle its debt. After that, the US could spend as much as it wanted; the gold parked in Ft. Knox stayed put.
And so the deficits grew year after year like the children of Abraham. But in the ’90s, a remarkable thing happened. Practically the entire developed world began running fiscal surpluses. The US. Canada. Sweden. Finland. Europe. The entire OECD. From deficits of about 1% of GDP, budgets improved, with surpluses of about 2% by the end of the ’90s. This seemed to prove that civilized men and women, even in the time of paper money, can get control of their budgets. We already knew they could ‘spend now.’ It was beginning to look like they could ‘cut later’ too.
In June 2000, Clinton administration economists predicted that the surpluses would keep coming, rising to as much as $1 trillion over the next 10 years. But the US economy seems to have gone from Heaven to Hell in less than a decade. The race that turned deficits into surpluses lost its magic touch within 18 months. By 2002 deficits were back. And they were staggering, nearly $3 trillion worth of deficits in 2009 and 2010 alone.
The economists completely misunderstood what was going on. The triumph they celebrated was not in themselves but in their stars. They had just been lucky. Bill Clinton’s administration had kept up spending just as the Reagan team had before them, from $1.4 trillion in ’94 to $1.8 trillion in 2001. But interest rates fell. Credit grew. And the economy boomed.
The Clinton era boom is now the Obama era bust. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won’t help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier. Credit is contracting.
So Krugman will be proven right after all after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say ‘I told you so’…and spend the rest of his career in darkness and confirmed delusion.
Bill Bonner,
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Well the stocks have had their best week in years…so the recovery is back! Based on Google in China it somehow saved the market! Hallelujah. and just ignore all of the homeless people camped out in the park downtown.
I love how Bonner writes. Like all great communicators, he never met a sentence that didn’t read better when cut in half.
Bill, I’d love to see a sort of “Devil’s Dictionary” piece in which you define terms used in the economic debate. For example, “austerity” actually means “living with one’s means.” “Stimulus” means “racking up massive deficits.”
Now, Krugman describes balking at spending a few more trillion as “penny-pinching”!
“Bill Clinton’s administration had kept up spending just as the Reagan team had before them, from $1.4 trillion in ’94 to $1.8 trillion in 2001. But interest rates fell. Credit grew. And the economy boomed. The Clinton era boom is now the Obama era bust.”
BB should know better. Clinton spending went up but just slightly. He did produce a surplus. Given the size of US economy, any damages Clinton did were in the range of rounding error.
The real damage was done under GW Bush and his gang of cohorts in Congress, Fed, Wall Street. Bush 8-year term was when economic, political, trade, military and homeland insecurity insanity ruled the day. The sh** hit the fan and now left to Obama to clean up the wall. But no matter how much he cleans, he gets the Bush sewage.
Don’t you see? There is no such thing as a failed stimulus, failed wars, failed educational system, failed healthcare, failed anything…it”s simply that they aren’t functioning at their potential due to lack of resources. If only we spent more, these things would surely be fixed. The blame goes to those of us who are too unenlightened, cheap, or anti-social to support it…not to the leadership.
Bill said:
The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better.
Interesting Bill….
But I have to be supicious of an analyst who predicts doom and then if does not happen claims the government is faking the numbers.
The Government may be stupid and bloated.
But do we really think the employees at the Bureau of statistics are purposely faking the numbers?
Call me back when the doom you predict actually arrives. (Dow 4000 and all). (Actually of course it would be a wonderful buying opportunity, but I won’t hold my breath waiting for it)
Figures of deficit/surplus are merely for our eyes. There are hidden assets so there are hidden liabilities. A good craftsman has the ability and talent in crafting a master piece that assets and liabilites are in conformity and harmony.
Well, it is not totally true to say proletariat against bourgeois. At most proletariat only scratches your outer skin
and refrains himself from sucking into your inner blood circulatory system. Neither, it is totally false to say that friends are the most deadly enemies.
For sure, austerity will not bring properity. Neither stimulus would bestow a track out of the wood. In the final analysis, both will present a deathday’s gift.
Hello, hello is the the friend of investors? This is Bill calling. Are you looking out your window. See those idiots driving around and partying like there is no tomorrow? Guess what. If they keep it up there won’t be.
“Clinton spending went up but just slightly. He did produce a surplus.” Clinton produced nothing. He rode the wave of an internet boom, and chose not to retaliate against terrorist attacks, leaving that burden on the next president.
So much blaming of government failure. What about all the corporate greed and consequent failure in the US. And now Wells Fargo decides that it is not in the sub-prime lending market any more, and lays off hundreds more.
Profligate government spending may not be so smart, but such government spending is an effort to cover the mess caused by corporate greed.
Is the alternative for governments to sit on their hands and observe even greater unemployment? Maybe they could start by cutting the US militarism and associated budget?
On yesterday’s thread:
Red_Queen_race quoted me as saying
“The profit comes from customers of the businesses, not other traders. You must learn this.”
I was speaking of the profit that a buy and hold investor makes in the long term.
Red Queen responded:
Unless that business pays a dividend the only way one makes money is out of the pocket of another “investor” or if the business chooses to buy back its shares (there is no obligation for them to do this).
Red Queen you are wrong. Consider Berkshire Hathaway as the ultimate buy and Hold. It was about $14 in 1965 and now is $118,000. You read right that is the same share. no splits, to consolidation.
The only dividend was around 10 cents in 1969.
According to you theory, holders of Berkshire only profit by selling.
The reality is the profit on Bekshire comes from the retained profits.
If you sell a Berkshire share, the buyer buys it for future profits not dividends.
Understand it, companies nmake money from their customers. You can make money with buy and hold even if there are no dividends.
Understand this: Trading is a zero sum game (negative after costs)
Buy and hold (the market) is a positive sum game as oprofits gush in from the customers of the businesses.
Anyhow, most investors don’t get this…
When Clintoning is concerned, Please refer to Moni, who, I presume, has all the insider information. Others do not try to be smart.
Screw the wealthy elite and financial industry. Let the ‘saver’ bond holders eat paper. The US can print 3 denomination bills: a million dollar bill, a ten million dollar bill and a billion dollar bill and pay the ‘savers’ off. Dump the Fed and place the board under house arrest. Pay off and reduce individual citizens’ debt by 95 percent and tax all treasury pay-offs at 95 percent. A new citizen’s treasury can then create a new currency based on denominations other than those recently created and thereafter abandoned. Nationalize the banks. Tax earnings of more than 400 K a year at 95 percent. Confiscate all properties of citizens having savings or properties outside of the US. Develop an extreme nationalistic militaristic state, where all are ultimately employed by the state. Develop a very empowered state intelligence agency. Set up reeducation camps for speculators, the wealthy, the members of the financial industry, and other undesirables. Augment and sophisticate the nuclear arsenal and use it a few times to validate willingness… This is why a few Nobel Laureates don’t want a compensatory depression for all of the 65 years of excess debt that the Federal Reserve, Wall Street, and the wealthy elite have enserfed the preposition ending world with.
The Clinton years were the luckiest for any President EVER…
The world and his wife had bought into the computer, and the internet, and almost 50-60% had 16bit operating systems, on a mixture of 32-bit and 16bit hardware… and it needed to be changed by midnight Dec 31st 1999. (or so the doomsayers said)
Now as luck would have it. Some tiny little upstart of a company sold their Internet Browser – Internet Explorer to a huge behemoth called Microsoft for $150k, in 1994, plus a royalty on every copy that Microsoft sold… And what did Microsoft do??? They GAVE it away…
The hardware, the operating system, the software, the databases and the switches, and internet routers and, and, and… ALL (or the vast majority anyhow, were designed and/or built by the good ol’ U.S. of A. And along came the World-Wide Web made useful by Tim Berners Lee, and made a whole new way of communicating.
And after the software and hardware and routers, and cables and switches had been installed and tested (and in some cases found wanting) then the work was mostly done… and the world could get back to doing what it had done..BUT so much effort had been put into solving these problems, amd so much money had gone to the U.S., and people like me had made so much money from writing software, and replacing kit, but that wasn’t going to happen ever again.
So all these people that were VERY expensive now had to re-skill, and do other stuff, and the post-Y2K recession was just the start of the downwave, and we’re still riding that one…
The baby-boomers start retiring in droves in 2012. Then watch the markets…
EVERY one who retires in the UK, the U.S. and for all I know lots of other countries too, will sell their pension plan, and purchase an annuity…
Markets will go into Free-fall. TRUST me… (I’M A BABY BOOMER) And GOLD? Perhaps it will go to the moon…maybe $5-8k oz)
Housing, Stocks, Holiday Lets will all tank as the great unwind takes place. You have been warned.
W.
Looks like daylight robbery will occur at anytime any moment.