Monetary Stimulus Produces Phony Recovery

Got money?

You might find it hard to hold onto. Americans with money are caught in a vise. On the one side is the de-leveraging economy. On the other is the government.

The depression squeezes everything – asset prices, businesses, earnings. And it’s going to be with us for years – no matter what the papers tell you. Get ready for a 20% decline in stock prices, says our old friend Marc Faber. Another analyst puts the current P/E at 22…also implying a loss of about 20% just to get down to ‘normal’ levels.

But “this isn’t a normal environment,” says a senior analyst at Ned Davis Research.

Well, it’s normal – for a depression. When word gets around, you’ll see stocks lose ground. Housing will probably go down in price too.

Meanwhile, over on the other side of the vise, Mr. Obama says he wants to raise taxes on the rich and on businesses by $1.9 trillion. Let’s see. We’ll make some guesstimates. There are about 100 million families in the US. Of those, about half are net taxpayers. And the top 10% are said to own half the wealth in the US and already pay 66% of its total taxes. Looks like they’re going to get whacked again. Each of the ‘rich’ families will pay nearly $200,000 more in taxes.

The idea is to make the tax system more ‘balanced,’ says the president, by taking more money from the people who pay the lion’s share of US taxes…and giving it to people who don’t pay anything.

Here’s a comment from Chris Edwards of the Cato Institute:

“President Obama has introduced his budget for next year. He proposes that the government spend $3.83 trillion in fiscal 2011. To put that number into context, let’s take a trip down memory lane.

“Pres. George W. Bush…came into office when annual federal spending was $1.86 trillion. He proposed to increase spending at a healthy clip, rising to $2.71 trillion by 2011.

“Bush and his team started blowing their budget almost immediately. They kept spending more and more – wars, a giant new homeland-security bureaucracy, a big-government response to Katrina, the prescription-drug bill, doubling K-12 education spending, big pay raises for federal workers, financial bailouts, and so on. I can’t think of a single crisis that occurred on President Bush’s watch that the Bush-Rove team didn’t have an interventionist and big-spending response to.

“In Bush’s last year, FY2009, the government spent $1 trillion more than the Bush-Rove team had originally planned. It is true that 2009 spending included $112 billion for the Obama stimulus bill, so let’s take that out. With that adjustment, the Bush-Rove team ended up spending $916 billion more annually by 2009 than they had originally planned. Note that the wars in Iraq and Afghanistan cost only about one-fifth of that 2009 excess spending amount.

“Then Obama comes into office and turns out to be Bush on steroids with respect to federal spending. Obama is calling for spending $3.83 trillion in 2011, or $1.1 trillion more than the federal budget nine years ago had promised. That’s a 41 percent forecasting error.

“The lesson from all this is that an administration’s promised spending beyond the first year is meaningless. Obama is proposing a freeze on a very small part of the budget, for example, but his budget plan next year will likely find reasons to break that promise. It scares the hell out of me that federal spending down the road could be 41 percent higher than even the huge increases projected by Obama…”

We understand the larceny of the tax increases. What we don’t understand is the economics.

The idea of a $3.8 trillion budget is to stimulate the economy. The Obama team knows as well as we do that this ‘recovery’ is mostly a mirage. Without jobs…and housing…you can’t expect real growth.

Monetary stimulus has failed. Mr. Bernanke supplies the banks with all the free money they want. All they do with it is pay themselves bonuses. What more can Bernanke do? Rates are already at zero; they can’t go lower.

That leaves fiscal stimulus. “Spend more money!” That’s what economists such as Nobel prize winner Paul Krugman, The Financial Times’ lead economist Martin Wolf, and Japan expert Richard Koo are whispering in Obama’s ear. Spending supposedly boosts sales and creates jobs.

But if you’re just taking money from one pocket and putting it another, what’s the point? There is no net increase in spending power. Still, economists argue that the rich don’t spend their money; they save it! And we know what an awful thing saving is…

Taking money from ‘the rich’ actually retards a real economic renaissance. The rich are the ones who consume the most…because they have the most to spend. More importantly, they’re the ones who fund the small businesses that do the hiring. Banks won’t take a chance. It’s the relatives…and ‘the rich’ themselves…who put their money on the line.

Either someone forgot to explain this to the Obama administration or they just don’t care. In Washington, politics trumps economics every time…

And now, both politics and economics are putting pressure on Americans with money.

The Daily Reckoning