海角大神

Still waiting for the hand-off from the government stimulus to the private sector?

While others look for the private sector to pick up the slack as the stimulus fades away, the market continues its cycle of mistake and correction, mistake and correction.

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Newscom / File
Runners hand off the baton during a college women's 4 x 400m relay at Franklin Field in Philadelphia, Penn., in this file photo from Apr. 22. While governments scratch their heads looking for the 'hand-off' of the economic recovery from the stimulus to the private sector, the market continues on its own mistake-correction cycle.

We went to our last summer soiree last night. It took place at a neighbor鈥檚 chateau, where a large, ancient stone barn had been transformed into a dining room for 100 people.

鈥淲e鈥檙e screwed鈥o are you鈥︹ said a friend.

First, an update from Wall Street: the Dow was unable to sustain a bounce yesterday. It fell 74 points. Gold dropped $3.

Hiring鈥ouse sales鈥he latest news confirms that there is no real recovery going on. And now this from the AP:

The government is about to confirm what many people have felt for some time: The economy barely has a pulse.

The Commerce Department on Friday will revise its estimate for economic growth in the April-to-June period and Wall Street economists forecast it will be cut almost in half, to a 1.4 percent annual rate from 2.4 percent.

That鈥檚 a sharp slowdown from the first quarter, when the economy grew at a 3.7 percent annual rate, and economists say it鈥檚 a taste of the weakness to come. The current quarter isn鈥檛 expected to be much better, with many economists forecasting growth of only 1.7 percent.

Such slow growth won鈥檛 feel much like an economic recovery and won鈥檛 lead to much hiring. The unemployment rate, now at 9.5 percent, could even rise by the end of the year.

鈥淭he economy is going to limp along for the next few months,鈥 said Gus Faucher, an economist at Moody鈥檚 Analytics. There鈥檚 even a one in three chance it could slip back into recession, he said.

In addition, the impact of the government鈥檚 $862 billion fiscal stimulus program is lessening.

That leaves the private sector to pick up the slack. But businesses are cutting back on their spending on machines, computers and software, according to a government report earlier this week. And the housing sector is slumping again after a popular homebuyer鈥檚 tax credit expired in April.

鈥淲hat we鈥檙e seeing is that the hand-off to the private sector is not looking as robust as we had previously hoped,鈥 said Ben Herzon, an economist at Macroeconomic Advisors.

A handoff? What an imagination!

As if the private and public sectors were running a relay鈥ooperating to make our lives richer and better鈥ased on a game plan developed by the coaches at the Federal Reserve!

We have news: it doesn鈥檛 work that way.

鈥淥办补测, Mr. Smarty Pants, how does it work?鈥

Glad you asked.

In the real world, the economy is always making mistakes鈥nd always correcting them. Making mistakes鈥nd correcting them.

And markets are always discovering what things are worth. They figure out what one thing is worth, conditions change鈥nd they change their minds.

There are times when the economy makes a big mistake 鈥 especially when it is given the wrong signals from the Fed. And there are times when markets change their minds dramatically.

Investors don鈥檛 like it much when the economy and the markets turn down. It makes them look like morons鈥hich they usually are. Businessmen don鈥檛 like it much either. Falling sales or failing businesses make them look incompetent and reduce their compensation. The average person doesn鈥檛 like it because he loses his job鈥nd sometimes his savings. And the politicians don鈥檛 like it because they pretend to have everything under control; when things seem to go wrong, voters blame them.

So, the politicians 鈥 with their lackey bureaucrats and stooge economists 鈥 take action. They do something! Newspaper columnists and TV commentators argue about whether they do the right thing or the wrong thing鈥oo much or too little鈥oo soon or too late. But actually, anything they do will be wrong 鈥 unless it is merely removing some previous 鈥渋mprovement.鈥

鈥淲ait a minute鈥 Are you saying that all these recovery programs鈥nd raising and lowering interest rates鈥nd providing support for key industries鈥nd help for people who are unemployed鈥 Are you saying all that is a waste of money?鈥

Oh no, we鈥檙e not saying that. We鈥檙e saying it is worse than a waste of money. It makes people doubly poorer 鈥 first because of the actual cost of the recovery programs themselves鈥nd second because the programs interfere with the economy鈥檚 efforts to correct its mistakes and find proper prices.

Even the most apparently benign 鈥 and some would say, humanitarian 鈥 government interference is far more harmful and costly than people realize. Take jobless benefits, for example. At least they don鈥檛 do any harm, right?

Wrong! Jobless benefits rob Peter to pay Paul because Peter has a job and Paul doesn鈥檛. Why do that? Paul might take his time finding a new job.

There are no new jobs, you say? Don鈥檛 be ridiculous. There are always things that need to be done. Jobs are like anything else; you just have to find the market clearing price. If wage rates were low enough everybody would have two jobs. But who wants to work for substantially lower wages? No one. Most people will only do so if they have to. As long as he is getting unemployment compensation, Paul doesn鈥檛 have to.

鈥淲hoa鈥his is radical鈥ounds almost subversive. You鈥檙e saying government shouldn鈥檛 be involved at all.鈥

鈥淥h no鈥 We don鈥檛 give advice here at The Daily Reckoning. We鈥檙e just saying that if people want to be poorer they should invite as much government meddling as possible鈥. Get government to make lots of rules and then change them often鈥 Put everyone on the government payroll; turn them all into zombies鈥︹

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