Economic Stimulus Can't Stop De-Leveraging

You say yes, I say no
You say stop and I say go, go, go
Oh, no

– The Beatles

We keep saying the same thing here at The Daily Reckoning. Not because we lack imagination… It’s because things are still the same.

“Outlook for home prices grows darker,” says The Wall Street Journal.

Well, yes. Much darker. Bloomberg:

Sales of US New Houses Plunge to Record Low as Credit Ends

June 23 (Bloomberg) – Purchases of US new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Exceeds Drop Projected

Sales were projected to drop 19 percent to a 410,000 annual pace, according to the median estimate of 76 economists surveyed. Forecasts ranged from 300,000 to 530,000. The government revised April’s purchase rate down to 446,000 from a previously reported 504,000.

Hey, what happened to that $12 trillion worth of stimulus spending, guarantees and bailouts? We said it wouldn’t work from the get-go. They said ‘yes, it will.’ We said ‘no, it won’t.’ Can we have our money back?

Last week’s report showed that used or existing houses were not selling. Now we find that new houses are selling even worse. The tax credit doesn’t really expire until the end of this month. But you can’t build a new house in 4 weeks, so the May new house data reflects the end of the credit.

You’ve heard the expression, ‘bad money after good’? Well, stimulus money was bad money from the beginning. It headed down the drain the minute it left the bank. Trillions of dollars wasted. And for what?

That’s the interesting thing. The feds couldn’t really stop the process of de-leveraging. They could make-believe…with federal spending projects that looked a little like real work…and handouts that looked like real income.

But all they could really do was rob Peter to pay off Paul…or rip off them both with debts they couldn’t pay and phony money they couldn’t back with anything real.

All they did was make sure some people were hurt worse than others. Shareholders, for example, lost trillions as stocks fell. The market has recovered much of the loss, but US stock market investors are still out more than $3 trillion. Homeowners lost big, too. Clip 20% to 50% off the value of America’s housing stock and you’ve erased as much as $10 trillion. We don’t know yet. The housing market moves slowly. It discovers what things are worth…but only by fits and starts.

After the latest housing news, our guess is that house buyers are going to squeeze their nickels even harder. And house sellers are going to be even more desperate. Between the reluctance of the buyers and the eagerness of the sellers, house prices will probably come down another 10% to 20% – maybe more – before they finally reach bottom.

But thanks to the generosity or stupidity of the US government, bondholders have done pretty well. Instead of letting the whole capital structure collapse, so that it might be rebuilt on a more solid foundation, the feds bailed out the bondholders…who just happen to be very cozy with Wall Streets big banks and federal authorities.

Then, of course, the feds congratulated themselves. They avoided a disaster. They saved the world. They brought the world economy back from the brink of catastrophe. At least that is how they and the press spun the story.

For our part, we would have preferred to see the whole thing go over the edge. Not that we know what kind of catastrophe would have resulted. But we wanted to find out. And whatever it was, we doubt that it would have cost $12 trillion.

In fact, the price would have probably been only a fraction of that amount… For every bondholder who would have taken a loss there was a debtor somewhere who would have been relieved of a burden he couldn’t pay. In the present case, the debtor was relieved of his burden. The feds took it over from him. Now, it’s on all our backs!

Bill Bonner
for The Daily Reckoning

The Daily Reckoning