More Government Stimulus and More Debt

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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The future of U.S. fiscal policy can be seen in Japan today. The Japanese government announced on December 8th a new $81 billion stimulus package to prop up their sagging economy. This is only the latest of a long string of stimulus measures that have been enacted since the early 1990s. All of them worked for only a short time and then had to be followed up by new stimulus measures. The same day, President Obama was announcing a new job creating stimulus package for the U.S., even though the U.S. economy is supposedly already in recovery and the December jobs report indicated an improved employment picture. Investors should keep in mind that action speaks louder than words (and questionable statistics).

The latest Japanese stimulus package will be used to prop up regional economies, for public works projects (a perennial favorite of their failed stimulus packages for more than 15 years), for energy efficiency initiatives and loan guarantees for small businesses. In contrast, the Obama plan will focus on helping small businesses, energy efficiency initiatives, and public works projects involving transportation infrastructure. Looks like a copy of the Japanese approach to me. The idea is to pay for it with $200 billion of unused TARP funds. The only impediment to that is that the original bill specified that this money should be used for reducing the U.S. budget deficit. The Obama administration clearly has no intention of doing this and the implications for an already out of control budget deficit and spiraling U.S. national debt are clear.

The Japanese were once fiscally responsible, but that ended long ago with the failure of their banking system in the early 1990s. The picture in the U.S. for 2007 and 2008 is quite similar - in regard to the banking failures that is, not the fiscal responsibility. Despite an almost endless succession of stimulus plans, the economy has fallen into recession over and over again. This should be thought of as the modern Keynesian version of a depression. The cost of all the government programs has been tremendous. The ratio of public debt to GDP in Japan is estimated by the IMF (International Monetary Fund) to be 218% this year. This is the highest by far of the top economies. It is expected to rise to 246% by 2014. The Japanese budget deficit this year is expected to exceed tax revenue. They have only managed to get away with this by keeping interest rates close to zero for more than a decade. Time is running out for them however. They are already engaging in money printing to pay for government operations and this will eventually turn their long running deflation into a very serious inflation problem.

The U.S. which is at the earlier end of the 'banking crisis with never ending bailouts' curve currently has a public debt to GDP ratio that is supposedly only 83% (if you adjusted the official government GDP numbers to something more realistic, it would be 110% or more). The budget deficit in fiscal 2009 was $1.42 trillion - and that was considered good because it was less than expected. The national debt increased by $1.9 trillion however. Intergovernmental transfers and off-balance sheet items account for the discrepancy. The U.S. national debt is now over $12 trillion and rising rapidly. Keeping short-term interest rates close to zero allows this to continue since 44% of the debt is funded with bills of one-year duration or less. An examination of the 2010 U.S. federal budgets shows that 40% of the funding is expected to come from borrowing. Money printing would be included in the borrowing category.

There are worries in the Eurozone about Portugal because it expected to have a public debt to GDP ratio of 90% by 2011. The official U.S. numbers could be just as bad (the actual ones much worse). As the largest economy in the world and the issuer of the world's reserve currency, the U.S. has a lot more leeway in fiscal irresponsibility. The limits of that leeway will probably be revealed in the next few years in Japan.

Disclosure: Not relevant.

NEXT: Is the Gold Correction Over

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Non-Stimulating Economic Stimulus Plan

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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President Obama was defending his economic stimulus plan over the weekend in a radio address and in an op-ed piece in the Washington Post. He rejected calls for a new stimulus package. In a really eye popping statement in the Post, Obama stated that his stimulus program "was not expected to return the economy to full health, but to provide a boost that would stop the free fall." Now, that's a real ambitious goal! Left unanswered was, what is being done that is expected to return the economy to full health?

The Obama stimulus plan has a number of components and it is questionable how economically stimulating most of them will be as is. The first phase of $288 billion in tax cuts has mostly been implemented. The result? The U.S. savings rate went up significantly. Those people who didn't save their tax cut money, paid down their personal debt. The money didn't go into the economy. So much for that part of the stimulus plan. Tax cuts for stimulating the economy are more of a Republican idea though. Why they were the cornerstone of a 'change you can believe in' Democratic economic program is a good question.

Other components of the $787 billion stimulus include major increases in Medicaid spending, about $48 billion in highway and bridge construction and billions more to boost energy efficiency, shore up state budgets, and increase educational spending. How increasing Medicaid spending boosts the economy is beyond me. This type of spending is a drag on the economy. Bailing out state governments (the plan is not exactly doing a good job on that one so far based on what is happening in California) also is not going to stimulate the economy. It indeed might keep the economy out of free fall however. As for the alternative energy component of the plan, this is something with long term economic potential, not short term. The Democrats recent attempts to keep energy prices low by having the CFTC manipulate the market are going to undermine this part of the stimulus program because alternative energy will be too relatively expensive to be economically viable. The one component of the plan that would both stimulate the economy in the short term and long term is the money for fixing the U.S. transportation infrastructure. This accounts for only 6% of the plan's spending.

There is also no reason to think that the plan should be having any effect by now anyway. Only $60.4 billion of the non-tax component has been spent so far. As reported in the Wall Street Journal this weekend, the White House isn't changing its goal of spending 70% of the stimulus funds by September 2010 (yes that is 2010, not 2009). And people are wondering why the stimulus plan doesn't seem to be effective so far. I think I have the solution! Money spent next year can't possibly stimulate the economy this year. While this may seem obvious to anyone who isn't in a coma, it seems to have alluded the political establishment in Washington.

We are now in the 20th month of the current recession, which makes it a post World War II record breaker for the U.S. The previous longest recession was 16 months. Based on monthly statistics there is no evidence that the decline is going to stop any time soon. When the negative numbers turn positive is when recovery is taking place, not when they become less negative. Despite this Obama stated in his weekend messages that "unemployment tends to recover more slowly than other measures of economic activity", implying that recovery is taking place overall. This is not happening, things are only get worse at a slower rate. Of course, this is like saying we are sinking into a depression slowly instead of quickly. According to his Washington Post article, this seems to have been Obama's goal. With success like this, who needs failure?

NEXT: Government Sachs - Earnings and Market Manipulation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.