So much stimulus, so little to show for it
First, let鈥檚 step back and look at the big picture.
In 2007, after 60 years of stretching credit, the US economy snapped.
Savings rates went up鈥rom near zero up to 7%. Houses went into foreclosure. People tossed away their credit cards. Wall Street wobbled鈥nd almost fell.
The feds rushed in, trying to stop the correction.
They threw everything they had into the fight against the big D 鈥� deflation, de-leveraging, default, and depression.
Fiscal stimulus, monetary stimulus, unorthodox stimulus 鈥� trillions of dollars鈥� worth. The biggest stimulus program of all time 鈥� with budget deficits of 10% of GDP鈥pecial stimulus spending on 鈥渟hovel ready鈥� programs for $800 billion鈥ero interest rates鈥nd a total of $1.7 trillion in Fed purchases of mortgage backed securities and US Treasury debt.
What happened?
Well鈥ot much. Unemployment rose to nearly 10% (after President Obama promised that his stimulus program would hold it at 8%). About 30 million people are still jobless.
House prices are still falling. Foreclosures are still rising.
GDP is positive鈥eaning, technically, the recession is over. But after such overwhelming stimulus (negative interest rates for more than 2 years)鈥ou鈥檇 expect more than a tepid increase.
Besides, who knows what is really going on? The figures are all in terms of dollars. And now, who knows what the dollar is worth?
The feds鈥� hot money has swamped the world. are soaring. Oil is approaching $100 a barrel. And a prominent analyst predicts that it will hit $300 by 2020.
The feds say the US core inflation rate is still less than 2%鈥ut the core rate doesn鈥檛 include the things that are going up 鈥� food and energy. Properly adjusted for real cost of living increases鈥�
鈥nd shorn of the curly growth caused by government鈥檚 deficit spending (which it can鈥檛 continue forever)鈥�
鈥eal GDP growth might actually be negative!
The Great Correction continues, in other words. Confusing and frustrating鈥ith mixed signals and false starts. And it will continue for a long time. For the harder the feds fight against it, the tighter the ropes become.
The feds鈥� hot money boosts stock prices. But prices for the raw materials go up too. And food and energy prices paid by consumers. The consumer has less real purchasing power. Business profit margins are squeezed.
Meanwhile, the Fed continues printing dollars 鈥� $600 billion of them scheduled for January to June of this year. Alert dollar holders wonder how long it can continue. Shrewd investors wonder how it could stop.
If it takes a $1.5 trillion budget deficit and negative interest rates to produce 3% growth鈥hat would a balanced budget and a 3% lending rate do?
We don鈥檛 know. But we know one thing: no one in Washington or in a position of authority wants to find out.
The Financial Times yesterday reported that Mr. Obama will propose cutting $1.1 trillion from US deficits over the next 10 years.
Hey鈥� Wait a minute鈥� That鈥檚 $110 billion per year鈥ut of a $3.7 trillion annual budget 鈥� a cut (please sit down, dear reader) of 3%鈥r only 7/10ths of 1% of GDP!
Woo hoo! Hallelujah鈥�
Our problems are solved.
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