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Macro Economic Trends and Risks
Is Economic Stimulation the Cause, not the Cure?

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By RodgerRafter
January 23, 2008

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The main reason we're in this problem now is because the policy for the past 25 years has been to over-stimulate the economy at any sign of slowness. We've had deficit spending, low interest rates and especially easy credit pretty much unabated. Now the bankers who made stupid loans are getting burned, the consumers who bought more than they could afford are getting squeezed, and the government has a debt burden it will never be able to pay off.

So of course the first answer our leaders in Washington resort to is to apply more stimulus... record levels of stimulus... $140-billion-stuffed-into-the-pockets-of-businesses-and-consumers-in-the-desperate-hope-that-they'll-spend-the economy-into-better-health stimulus. The problem is the biggest one ever faced (post gold standard) by government and the Fed and their answer is the biggest stimulus package ever created. What else did you expect?

The stimulus package will achieve two things. First, it will slightly slow the onset of the impending economic disaster. Second, it will guarantee that the eventual fallout is much worse. The logic behind the package seems to be that consumers are being overly cautious with their spending, so encouraging them to spend more temporarily will help us avoid a temporary slowdown. Of course this misses the point that we have huge systemic problems as a result of years of excessive money creation via government and private sector debt accumulation. We should be recognizing that we're heading for an era of much lower consumption in he US and rebuild our economy to cope with that fact, rather than financing one final consumer spending binge.

I don't think that the people behind this plan are truly clueless idiots. There are political agendas to be satisfied in this election year and the financial sector is desperate for a little cover that will let them pawn some of their own long term problems off on the American public. Politicians are jumping at the opportunity to buy votes. They're already foaming at the mouth in their partisan politicking about how the other side wants to give the money to the wrong people and how their plan is to give you, their constituents, the most money first.

Meanwhile, rapid money supply growth (the inflationary, unsustainable key to our growing economy over the past 2 and a half decades) is hitting a wall. With consumer, homeowner and corporate debt expansion hitting a wall for reasons of insolvency, who else can borrow the country to prosperity besides the US government? And that may be the real reason this plan enjoys the support of the Fed and Wall Street. If the Government borrows another quick $140 billion, then that'll help pick up where the private sector has begun to collapse.

But who's going to finance the additional debt? Take a look at the recent Major Foreign Holders data from the Treasury and you'll see that most countries are decreasing their treasury holdings. Banks are selling off treasuries too. Hedge funds have loaded up via the carry trade, but they are reaching their own credit limits. Is anyone left out there who's willing to buy another $140 billion in US government debt? The Fed is the money creator and lender of last resort and they've been very creative in inventing new ways to inject money into the financial system lately. Perhaps they'll just inject new money into the treasury if nobody else shows up at the weekly auctions.

Inflation (the real stuff, not the imaginary numbers reported by the BLS), a crumbling dollar, declining living standards, foreclosures, bankruptcy filings by companies and individuals, are all on the increase as the era of over-stimulation reaches is glorious end. The signs are everywhere, yet the mainstream media fails to recognize the cause of our problems or the logical flaws in the plans for more stimulus. So bend over America. You're about to get stimulated one last time.