US government spending induces counterfeit 'expansion'
There鈥檚 good news and bad news鈥nd a lot of news in between.
Consumers spent a little more than was expected of them. And manufacturing did a little better than expected too.
On the other hand, the federal government鈥檚 tax receipts plunged in the month of February鈥nd bank lending is still contracting. Last week it shrank $33 billion 鈥� the 7th week in a row it has contracted.
How does an economy expand when the banks are lending less money? Beats us.
We believe the 鈥渆xpansion鈥� reported in the GDP figures is mostly counterfeit. It鈥檚 government spending and hot money filtering into the economy. Still, it鈥檚 amazing that the GDP figures are positive.
The Dow was flat yesterday. The euro rose a little 鈥� on expectations of a settlement of the Greek affair. Greece only had a month to sort out its problems. That was two weeks ago. The 鈥渃lock is ticking,鈥� say news reports. Most likely, the Hellenes can鈥檛 really sort their problems out on their own. Greece will need some sort of bailout 鈥� even if it is limited and tentative 鈥� from Germany. Stay tuned.
It will be interesting to see what happens when Britain runs into trouble financing its deficits. It won鈥檛 have the Germans to help. Britain never took up the euro. It will be on its own.
But the big news from yesterday was the $19 boost in gold. Why did gold suddenly shoot up?
We don鈥檛 know. But our guess is that gold will suddenly shoot up a lot more. We鈥檙e in a deflationary period. That means everything is going down in price. But against what? Well, against money. Against real money that is 鈥� gold.
So gold should continue to go up until this deflationary period is over. That doesn鈥檛 mean there won鈥檛 be more hiccups and reverses in the gold bull market. But one of the surest trends of our time is the crack-up of the paper money system. And that is bound be good for gold.
Chris Wood of CSLA says he gives the dollar standard 5 more years. Maybe it will be a bit more鈥aybe a bit less. But one thing is sure. Governments cannot continue to run such huge deficits forever. There will come a day of reckoning鈥�
The feds are hoping it comes at a time and place of their own choosing. They all want to ease their way out of their troubles鈥ith the help of consumer price inflation. You heard central bankers talking last week about increasing the inflation target from 2% to 4%. If they can actually control inflation so precisely, it will be a miracle. But that is what they hope to do.
A few years of 4% inflation would do wonders. In ten years, they would have cut a third of the national debt 鈥� in real terms, of course (supposing that they don鈥檛 add to it even faster). Not only that, the debts of the private sector would be eased too. At 6%鈥ebts would be cut in half in a decade. With half the debt burden 鈥� the private sector might be ready to begin a new period of growth. That is the feds鈥� real strategy鈥o de-leverage the private sector enough that it can grow鈥nd increase tax receipts.
By the way, that was what happened in the Reagan administration. The inflation of the 鈥�70s forced up interest rates and caused the worst recession since the Great Depression. But it also lightened debt loads 鈥� so much that the economy was ready for another big growth spurt.
This growth really paid off in the 鈥�90s鈥nd the very early years of the Bush junior administration. Thanks to growing tax revenues, both Clinton and Bush were able to pay down the huge debts of the Reagan years鈥nd still increase spending. The economy was able to 鈥済row its way鈥� out of debt.
Then, with the war on terror and the micro-recession of 2001, the budget magic of the 鈥�90s was lost. Bush apparently never met a spending bill that he didn鈥檛 like. Spending exploded鈥specially time bomb spending for health care, which increases automatically year after year.
Then came the depression鈥nown popularly as the Great Recession of 2007-2009. Tax revenues fell. Spending increased even more. And now the deficits come hard and fast. And there seems to be no way to 鈥済row our way out鈥� of them. All of the conditions that made for a boom in the early 鈥�80s are making for a bust in the early 2010s. Interest rates are at record lows, not record highs. Stocks are high, not low. Bonds are high, not low. The government is the solution, not the problem.
------------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
