Bond market calls the Fed’s bluff

To Rolf Eilhauer of Northbrook, I would reply:

We were led by the nose into overspending and overconsumption.

When you make money almost free, there is no limit to how much people will borrow and use. To do otherwise is stupid. It’s the same with anything else. Try it by making medical care free — the lines will stretch around the block.

Denny’s just proved it with free breakfasts. Please see

http://money.cnn.com/2009/02/03/news/companies/dennys_breakfast.fortune/?postversion=2009020411

http://en.wikipedia.org/wiki/Denny’s

The Greenspan FED dropped rates to historic lows to juice the economy back in 2001 to 2004.

The acted as Social Engineers during that time, thinking they were doing “good”. Ask them now if they still think it was good. Ask the auto companies if it was good.

Now we are paying the price for that “good”.

Certainly some of the current financial imbalances were created over a longer period of time, but this last great blow-off in the Credit Bubble (the mother of all the other bubbles, like the Housing and Car bubbles) was created by Greenspan.

BTW, this was exactly the same “good” that the FED did in the 1920-s to bring us the 1930-s.

So what are we now doing to “solve” the problem?

Exactly the same thing that led us into the current tragedy.

More government spending and likely even inflationary money-printing by the same FED that gave us our current predicament will solve nothing.

So it goes — we try to fix the problems by doing the same things that caused the problems — really smart.

It’s like fixing potholes by digging more potholes. I guess with potholes it might at least work, so long as you dig all of the new ones everywhere to the same depth — then you will have a new road, at the same level as the deepest pothole you found on that road.

You can always make people go into more debt than is prudent by making SAVING a silly activity — why save when your money earns you nothing?

Better buy a house that will go up in value, right?

Well, it won’t work. People have woken up. Their personal balance sheets are in disrepair.

The government will spend and spend and then wonder why the economy is not responding.

Should we all be surprised?

Rolf in Northbrook, IL says:
“It is time to realize that, as much as we may hate to admint it, GOVERNMENT SPENDING IS MORE EFFICIENT than private spending. The way to get out of the recession is to INCREASE TAXES and INCREASE GOVERNMENT SPENDING.”

Rolf, even the most casual glance at economic history (both short-term/long-term and macro/micro) shows this NOT to be the case. Increasing taxes in times of difficulty has INEVITABLY led to larger economic issues.

As far as the $150 billion rebate, of course it didn’t help the economy directly. Due to this society’s credit addiction, once money (and credit) got tight, people began to pay down debt or just hold onto cash, depending on their situation. No one in their right mind thought that would be a real economic stimulus. It was far too small to have any significant impact. It paled in comparison to the problems caused by bad bank loans (both caused and encouraged through government). That “massive” (as you put it) $150 billion is but a drop in the bucket when you look at TARP and this alleged “stimulus” bill.

Please do us a favor. Go back to voting for yet another criminal governor, and leave the economic discussion to people who are smarter than that.

Last year we gave a massive amount of money to people on the theory that people spend money more efficiently than government. This theory has now been unequivalently disproven. Those massive amounts given to people did absolutely nothing to stop the economic slide into recession. It is time to realize that, as much as we may hate to admint it, GOVERNMENT SPENDING IS MORE EFFICIENT than private spending. The way to get out of the recession is to INCREASE TAXES and INCREASE GOVERNMENT SPENDING. There must be tax increases for the rich as well as the middle class. As President Obama said “everybody needs to have skin in the game”. On the spending side, it does not matter what the government spends the money on. As President Obama pointed out, all spending is economic stimulus. If you disagree with me, then tell me what good did that $150 billion tax rebate last year do for the economy

more debt is not the answer, stimuli are not the answer. The world is not going to sit back and accept that the US is going to continue to issue more debt that it clearly will not ever be able to repay.

The long-term implications for this are disasterous for those who will have to foot the bill.

If you really wanted to do something positive then Government would do a massive spending cut and eliminate tired old worthless departments and agencies that only drain off tax payer dollars and provide little justifiable result.

As I’ve said before if you’ve borrowed, spent, printed and inflated too much then more of the same will not right a sinking ship. A boom supported by credit expansion will always fail, there’s no avoiding it. This has been going on for so long now there’s no way for the Fed to patch this one over.

If DC doesn’t stop spending more money we don’t have this will destroy the dollar.

Paul makes many pertinent remarks in this piece.

He ends his essay with a few of the most significant IMO:

“Since investors tend to scoop up bonds, and push their yields lower, if they think that Treasuries are a safe place to be in a rocky market, it is troublesome that there has been an exodus from longer-term Treasuries lately. The Fed may become the buyer of last resort.”

“‘It looks more and more like the Treasury is printing money if they just issue more and the Fed is the main buyer of them. I’m not sure if there is enough demand for the tremendous supply,’ Barbi said.”

“And if rates keep rising, that may counteract what the Fed and the Obama administration are trying to do to help the economy, namely keeping rates low and getting credit to flow again.”

I read these lines over a few times, and something dawned on me.

While many people have pointed it out, I never really dwelled on it too much.

Namely, with the amounts the Treasury Department needs, it is possible that by DRAINING those amounts FROM the private (more productive) sector, it will cause terrible harm in COMPARISON to what would otherwise have occurred WITHOUT their intervention.

That is, THE GOVERNMENT WILL SOON BE THE CAUSE OF AN EVEN GREATER SLOW-DOWN IN THE ECONOMY THAN WE ALREADY HAVE TODAY!!!

We all know that government-spent money is never as efficiently spent or as directly, as is private money.

When you spend YOUR money, YOU are careful. When the Government spends YOUR money, it is NEVER as careful.

So there is WASTE.

Not only that, many say that the Government “crowds out” the spending that would OTHERWISE have been done with that money.

Sure, some of it might have been saved (in Treasury bonds even) but some would have been spent the way that REFLECTS people’s utility for their own scarce funds.

So the end result is that the economy SLOWS DOWN even MORE than it otherwise would have. Possibly.

Or possibly, the SAVING that would have happened now does not, because the government is FORCE-spending YOUR money.

Even if the FED prints the money to buy the Treasury Bonds from the Treasury Department, this is still a form of indirect tax.

As Milton Friedman pointed out, monetary inflation is a form of indirect taxation, and we all pay as our diminished purchasing power is reflected in those debased dollars we still hold or manage to later earn.

And who is going to get raises to make up the difference in this economy? So there goes our purchasing power and standard of living.

http://www.fff.org/freedom/fd0712a.asp

http://www.econlib.org/library/Columns/y2006/Friedmantranscript.html

Milton Friedman’s own words: “Inflation is the one form of taxation that can be imposed without legislation.”

Taken from http://en.wikiquote.org/wiki/Milton_Friedman

Too expensive for who?

If the answer is the government, the no: it is just business as usual and they i=own the printing press.

If the answer is US, the American taxpayer, then yes.

We cannot afford to keep pushing through one TARP (then have the institutions we are supposed to helping fail because they (GULP) didn’t help them, then one Stimulus (which has gone from 800B to over 900B and counting, to Plan C (unknown and off to stage right) and on and on and on and on.

We are in a world of hurt and NO ONE knows how to get us and the world economy back on track.

One day, we will find out, but this stimulus plan is going to be a bigger DUD than the TARP.

Considering how in debt we are, of course it’s too expensive. Look at all the pork in this bill that has nothing to do with economic stimulus, and you’ll see it’s too expensive.

What would stimulate the economy (as it has in many Western countries) is a reduction in the corporate tax rate. You want jobs in the US? Make it worthwhile to set up shop here instead of anywhere else.

LOWER government spending in the long term would allow Americans to keep more of their money, which would then allow them to save, and eventually break their credit addiction (like I have). Instead, we just keep running up the country’s credit card, oblivious to anything but the very near future. The U.S. Government has become the college student with his brand-new credit card, who is only concerned about his next pizza and night out drinking. You think things are bad now? Wait until the bills come due…for your kids.

No. In fact, it might be too small. Here’s why:

If we spend $1 trillion on public works over 2 years, the people who receive the money will turn around and spend it, too, minus the leakage (money that goes into savings or to countries who don’t buy from us, like OPEC, Japan, India and China). Typically, > 80% of money received by companies and people gets spent quickly. Without going into the infinite series formula, this makes a $1 of stimulus have the effect of > $5 of total spending. If the government captures 30% of this spending in taxes (of which they spend > 100% immediately), and believe me they will capture these taxes, we actually get $1.5 trillion in government intake from $1 trillion of government spending. It more than pays for itself; this is how fiscal policy works, and it’s been done before.

This spending must be domestic (Buy American), it should be things that all of us can use (energy, hospitals, schools, public transit, repairing roads, etc.) and it should be targeted to the median income or below portion of our economy to get the most benefits (minimize tax cuts, which go mostly to companies and the rich, who don’t spend them).

Oh, and kill all of the bank bailouts. They are a total waste of taxpayer money, bailing out millionaires and billionaires.

I JUST CHUCKLE NOW… THE POLITICIANS IN WASHINGTON NOW SEEM TO THROW ABOUT BILLIONS AND TRILLIONS AS IF IT WERE POCKET CHANGE. ONE ISSUE I DO NOT SEE BEING MENTIONED IS, “GLOBALIZATION” THIS WAS SUPPOSED TO BE THE MOST WONDERFUL THING FOR EVERYONE. WELL NOW WE SEE THE RESULTS CHEAPER TEE-SHIRTS FOR EVERYONE, HOWEVER THIS MEANS ALL OUR MANFACTURING IS CHASING CHEAP LABOR IN CHINA ETC. ONE THING OUR HEADS OF STATE SHOULD START TO REALIZE IS SOME INCENTIVES TO HAVE A MANFACTURING BASE REMAIN IN THE USA. UNTIL THIS HAPPENS WE WILL CONTINUE TO SPIRAL DOWNWARD INTO AN ABYSS.

i have not talked with anyone who feels that we are headed in the right direction with this. The bill will come due, and we cannot keep just printing more money. Obama campained preaching his desire to go through the budget, through proposals and eliminate waste, and guess what we have, the same old crap. He should be held to his promise, but maybe he just thinks we all have amnesia.

Comparing the worthless Iraq war-NO. It’s not expensive at all.

Is the Pope Catholic?

Every time history repeats itself the price goes up.

Didn’t we already have a stimulus that was a really bad idea and didn’t do anything except ensure Wall Street got its bonuses.

Yes. However if the transfer payments to banks are stopped and reversed, maybe we can bail out the real economy.
However, I want $1.5 million to redo my office as did John Thain.

This is a trick question, right Paul?

Grossly too expensive.

The USA does not have the money to even remotely EVER pay for this economic debacle package. Passage of this monetary abomination will effectively seal the deal with a guaranteed economic DEPRESSION and an 800 lb. debt gorilla on our backs every single day for at least the next decade. This economic ’simulation” package will be the final nail in our monetary debt coffin. We will be screwed – no doubt about it.

The Law of Unintended Consequences will ultimately prove that ALL the governmental financial meddling will have been the most misguided, heavy handed, pain prolonging, mishandling of this recession that has ever been perpetrated on the American taxpayer, EVER.

What the government is doing is ABSOLUTE STUPIDITY, because all those in government are imbeciles. WE cannot SPEND our way to properity. We have already tried that experiment and that is precisely HOW we got here to begin with. Why can’t they (every politician) see that?

If anyone was trying to post a comment in the past hour or so, I apologize that you were unable to do so. We had a bad link in there and that has now been fixed. Hope to see some comments. Have a great weekend, everyone.

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