From one scam to another

Tim Geithner told the Chinese last week that the United States would revive thanks to increased private demand. But the feds cannot really increase demand in the private sector. Increasing real demand would mean increasing real wages. And there's no sign of that. To the contrary, incomes are going down. As long there is no real wage increase thus unemployment down to before crisis level, there won’t be any upsurge in consumer demand.

But even Timmy’s house in New York State bought for US$1,6 million and now on the market for 1,63 cannot be sold, due to lack of demand.

“Personal incomes went down 1.3% in June. Incomes had gone up in May, by precisely the same amount - 1.3%, thanks to stimulus payments.” Then, too, commentators saw it as a sign of recovery. But what the feds gave in May was taken away in June. The future caught up with the Obama administration's stimulus efforts within 30 days. Net result = zero.

'Cash for Clunkers' is a popular scheme to promote the sale of greener cars that aren’t. The idea is to stimulate demand by giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decided they need a new ‘greener’ car, which not even is an improvement to the greenness of the environment. In order to the get that money, people have to buy one.

According to the press reports, the program has been a great success wherever it has been put in place - in France and Germany, as well as in the United States. In the US the one billion dollars program should last till the end of November but was sold out in ten days so another billion is in the pipeline.

If so, why not apply this concept elsewhere? How about cash for
•    Houses? Amongst others: creating demand for Timmy’s house.
•    Vacations?
•    Electronic equipment?  
•    Newspapers?

What's so special about autos, in other words? And why is it a good thing for people to buy cars?

The auto industry is huge, with many lobbyists and many organized groups interested in its wellbeing. It is an old and well-established industry with plenty of political clout.

Tomorrow's more innovative industries, by contrast, have no lobbyists, no organized labour, no pet congressmen, and no political action committees. So who gets the money?

Here's the problem: the meddlers are not only up against tomorrow's industries they're up against tomorrow itself. It's not as if Americans and Europeans needed cars, not of that all. They've got plenty of wheels already. Three car households are typical. And they're fairly new cars. People were on a buying spree during the bubble era, 2001-2007; they bought new cars along with everything else.

So, the goal of the 'Cash for Clunkers' scheme is not to increase the size of the auto fleet, it's to make it newer. People don't need more cars. They only need to replace cars that get worn out. If they bought a car ten years ago, they may be ready to buy another one. Or, they could probably wait until next year. Along come the feds with cash, and the buyer decides to replace his car this year rather than next.

This is heralded as a success. The feds have stimulated demand but what about next year?

This auto clunker example shows the scam of stimulus schemes. They claim to boost demand. But they can't really increase demand. All they can do is roll next year's buying into the present year.

That's the very thing that has been happening for the last two generations. Consumers didn't want to wait until they'd made the money to take their vacations or buy their houses. They turned to credit. They borrowed against future earnings. They spent money they hadn't earned yet, thus bringing forward purchases that should have been made at some time in the future. That's why we have a depression; now we live in that previous future!

It had to come sooner or later. After drawing consumption forward for decades, people had to stop. Time had to catch-up. Homeowners had to pay down debt. Ken Rogoff, Harvard professor of economics, believes it will take them 6-8 years to do so.

But consumers spent more than they could reasonably be expected to pay back. They out-spent the future! They bought a ticket to somewhere beyond the future, to a place where they would never actually arrive. In many cases - especially in the housing market - lenders discovered they couldn't get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five - Bear, Lehman, Goldman, JPMorgan and Merrill - only two survived intact. And now it is known that Goldman only survived because former secretary of the Treasury, Henry Paulson and former CEO of Goldman, arranged a hidden bailout. He had the government step in to save with US$180 billion of taxpayer money AIG, which owed Goldman $13 billion.