Loose lips sink ships
PIM of SPAIN | August 8, 2009 at 05:53 amby
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• Wall Street uses bailout money for bonuses...
• Cash for Clunkers...
• Nationalizing GM…
• Quantitative easing...
• Geithner lies to the Chinese...
’Chinese assets are very safe,’ Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.”
Last week, Timothy Geithner promised the Chinese again that the US economy would recover thanks to demand from the private sector. That was his way of reassuring America's biggest creditor that the public sector wouldn't continue to run huge deficits - practically an outright lie. But it's one thing to stiff the Chinese; it's another to stiff time.
Why don’t people see what is happening?
Some observers think the economy is recovering already. Others think it is not. If it is not recovering, it is because it didn't get enough stimuli they say. If it is recovering, it's because the stimulus has worked.
The last quarter century the economic model created more mistakes than miracles. It encouraged people to spend, borrow, and speculate. And each time Mr. Market made a correction, the authorities came along with more money and easier credit. Businesses that should have gone bust years ago kept themselves alive with more and larger loans. Homeowners added more debt than they could carry. Speculators kept taking ever-bigger risks in a row. Total debt as a measure of the size of the bubble in the credit markets rose from only about 150% of GDP in the 70s and 80s, to 370% during 2000 -2008.
"Fewer layoffs expected as recession winds down," says a headline on wire services.
It is "business as usual at Goldman," says a news report. Which is to say, big bonuses for the bankers. The top eight US banks got more than $170 in bailout money last year. They paid about 20% out in bonuses.
The news is mixed. German factory orders are up...but the Bank of England says the recession is worse than expected; it says it will continue buying bonds.
Americans are raising chickens in their backyards again...even in places like Brooklyn. But the latest headlines tell that requests for unemployment benefits are running below expectations.
The housing market is supposed to be stabilizing, but new waves of defaults, resets and foreclosures are coming. “Half America's mortgages will be underwater by 2011,” says a Reuters report. And “Deutschebank warned that construction loans were starting to go bad too.”
"More Stimulus is Needed to Spark a Strong Recovery," is the headline. According to the IHT, stimulus is working. And it will work even better if there were more of it.
Can you really fix a debt-saturated economy by pouring on more debt? When you borrow money you take something away from the future and bring it into the present. That is not a bad thing, if you are doing it to increase your future output. In that case, you'll be able to pay back the loan with your extra earnings. But if you borrow from the future only to consume, you arrive in the financial crisis we are in today.
The future caught up with consumers in 2007. But the feds learned nothing, afterwards even Alan Greenspan admitted he had "found a flaw" in his own thinking.
Adjusted for inflation, the US consumer's earnings barely rose from the '70s. By some measures, he had actually less disposable spending power in 2007 than he had in 1973. And now his income is going down. The June number reflected the biggest drop in income in 4 years. Salaries and wages fell 0.4% in June...the 9th drop in the last 10 months. How is it possible for him to spend more?
From one scam to another, from bailing out Wall Street to bailing out the entire world economy, the more stimulus programs fail to bring a recovery, the more economists call for more stimulus.
What are they thinking? Since neither the private sector nor the public sector has any savings from the past, additional demand from either sector must be borrowed from the future.
The purest illustration of how this works is in the popular 'cash for clunkers' programs. Instead, of letting the consumer buy a new car when he is ready, the feds give them money to buy now. So, he buys in 2009 and not in 2010. What good is accomplished? It is as if they didn't expect 2010 to ever arrive...as if they thought they could stop the sun and the seasons...and the Chinese...forever. The dollar will always be strong. US bonds will always be in demand. And the future will never arrive.
But the more economists try to stitch up the future; the more it gets away from them. After the 2010 sales have been moved forward to 2009, they will have to reach into 2011...and then 2012...all the way to the end of time.
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