Phony Growth from Fiscal Stimulus

How was the first day of 2010? Well, most commentators would say it was a good day. The Dow rose 155 points. Oil closed over $81. The dollar fell. And gold shot up $22.

Is that a good day, or what?

‘Or what’ is probably the best answer. Stocks rose. But are they forecasting a booming economy? Or more EZ money from the feds? Are they signaling the end of the slump? Or, no end to the feds’ rescue efforts?

Here at The Daily Reckoning, we will stick with our view. We’re in a depression. It won’t end until it has done its work. And, with the feds trying to block it, prevent it, hold it off, deflect it and retard it, it could take years before this depression has finished its job.

Martin Feldstein, an expert on business cycles:

“The recession isn’t over.” In a Bloomberg Radio interview on December 17th.

David Rosenberg explains that 90% of the ‘growth’ in the third quarter came from stimulus measures. And that still only produced a 2.2% annualized GDP increase, far below the rates typical at the end of a recession.

“What is normal is that the first quarter of post-recession growth is that real GDP expands at a 7.3% annual rate; 2.2% is really nothing to get excited about – it’s actually quite worrisome.

“Never in recorded history has growth coming out of a string of declines been as weak as what we just witnessed. Considering all the government efforts to usher in a V-shaped recovery, what we saw unfold in the real economy in Q3 – admittedly quite divorced from the action in financial markets – was, in a word, sad.”

What is happening? How come so much government ‘stimulus’ produces so little real stimulation?

Well, because an economy is so heavy…you can only push it downhill!

Monetary stimulus only works when it pushes the economy in the direction it wants to go. When people want to buy, you can make them buy more by giving them more credit. But when they don’t want to buy, extra credit doesn’t help. Extra credit is what people don’t want. Offering them more of it doesn’t make it more attractive.

But government spending on the other hand – fiscal stimulus – is a more effective imposter. People see the feds spending money and they mistake it for genuine, economic activity. The government hires people. The government spends money. It looks just like the real thing!

Heck, it’s better than the real thing. Because the feds pay better. And they don’t have to worry about showing a profit either; the whole idea is to lose money…that’s what fiscal stimulus is all about. Want a fiscal stimulus program? It’s easy. Replace honest business activity with phony federal make-work. And replace honest workers with parasites!

Our friend Marc Faber writes that Congress has just voted the biggest health care initiative of all time – forcing everyone in the nation to participate, except Congress itself. The parasites have a better plan, naturally.

The number of federal employees making big money is growing fast. In the Defense Department, for example, “civilian employees earning US $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available…” writes Marc.

Marc sees the US rapidly becoming a banana republic, in which elites use positions of influence to feather their own nests. Federal employees, lobbyists, politicians, government contractors, favored groups – all of them connive to strip assets from the public and use them to cushion their own fat derrieres. Typically, the banana republics have nice weather and bad money. They borrow too much…run their printing presses when they get in a jamb…and then go broke.

The world turns, doesn’t it? While the US slips into banana-ism, the world’s biggest banana republic, Brazil, is booming. It has the number one position for stock markets in 2009 – up 145%.

The US is fast becoming the worst kind of banana republic…one with ice storms and no bananas.

The Daily Reckoning