The Obama Stimulus:
All Porked Up and Nowhere to Go
February 12, 2009
When I first saw the headline, "Obama offers A.R.R.P" I interpreted it as "Association of Recently Retired Persons", thinking it was a recovery group for the 600,000 Americans who lost their jobs in December. Not so. President Obama's American Recovery and Reinvestment Plan cleared the Senate today and has been sent to the operating room known as Conference Committee. For Canadians, a bit of explanation is in order. After the House of Representatives has passed a bill and the Senate has passed a similar bill, the two versions are sent before the Conference Committee to be "reconciled".
Do not picture a Prodigal Son-style reconciliation, full of hugs and tears. Picture something more like the reverse of an operation to separate Siamese twins. The Conference Committee will take the House's huge squealing hog of a bill, and the Senate's huge squealing hog of a bill, and attempt to splice them together into an even more immense Super Hog, but without so many extra hooves and snouts as to make people suspicious. If the monster lives, as it usually does, they will stamp the beast "Approved by Congress" and pack it off to the President, who almost always smiles and turns it loose on the unsuspecting public.
There is great speculation on the question of whether the Obama Stimulus Porker will gas up the economy and reflate us back towards prosperity. No one can be found (outside of the administration) who will call the package a panacea for our slumping economy. Some say they think it may help mitigate the loss of jobs and the plummeting velocity of money, although the Congressional Budget Office has expressed its doubts along those lines, and warned that it may have the opposite effect by soaking up scarce credit that businesses might have deployed to better effect.
The consensus of economists is that, since the vast majority of the spending and tax credits won't take hold before the end of this year, there's little to expect in the way of help for the economy in fiscal 2009. That's what we pay government for: We expect them to absorb and destroy any surplus wealth that's lying around, while delaying the benefits as long as possible, if there are any.
"Yes, yes!" irritated voices are crying. "We know what government is for. What we want to know is whether the net effect of this Obama Orgy of Redistribution will ultimately be inflationary, or if it will simply drag us deeper into deflation."
I'm so glad you asked me that. I'm going to answer the question, and do so in unambiguous terms. But first, I'll need to set the stage for my answer, as the trick requires a suitable backdrop and a few props in place.
First, let me startle some of you by planting a question in your mind: Are you quite sure we are presently headed for deflation? A recent comment-board antagonist accused me of imbecility on the grounds that "falling commodity prices is the definition of deflation". I must beg to differ, as I hail from Austria, economically speaking. As Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon." And by extension, so is deflation. What Uncle Milt was saying (and Milton was no Austrian, but a Monetarist) was that inflation and deflation are not questions of the direction of consumer prices. They are questions of growth, or shrinkage, of money supply. We'll come back to that.
But if my insulting antagonist were correct, and deflation was the term for falling commodity prices, I would only point him toward the chart of the $CCI, or Continuous Commodity Index. The $CCI represents a basket of 17 commodity futures contracts made up of all the goodies we need: energy, grains, livestock, metals and softs (softs are the most important category, because it includes coffee, without which human life is impossible).
The point is, the $CCI shows us that commodity prices are in fact rising, and rising briskly. The index bottomed in early December, and has since climbed from 322 to 370, almost 15% in two months. That's an annualized rate of 90%. Still sure we're in deflation? I must emphasize that the $CCI is not an index of consumer prices, but rather a reflection of what traders expect to happen to feedstock prices. But it does suggest strongly that consumer costs are on the way up.
And there's something else that might interest you. Most national currencies are declining in value energetically. Venezuelan inflation is now at 31%, Russia's ruble has declined by more than 20% just since November, the Euro is at its weakest point in years, and even in Canada loonie weakness drove produce prices up 27% in December YoY.
http://www.economicnews.ca/cepnews/wire/article/216576
Many other currencies are in trouble. The Mexican peso has declined drastically and now trades near 14 to the USD, down from around 11 a year ago. Iceland's currency crash is well known, but did you know that Hungary, Bulgaria, Ukraine, the Baltic States, Sweden, even Switzerland, virtually all of Latin America--all these places own currencies with decreasing purchasing power for the consumer?
Another contraindication for deflation is Treasury bond prices. In short, they are plunging and yields are rising. For a brief while, it seemed as if everyone on earth were cramming themselves into the U.S. Treasury Fallout Shelter. Evidently it got too crowded in there, and there may have been some flatulence, as droves suddenly fled the safety of T-bonds for something better than near-zero yields. Prices crashed.
What triggered the exodus? Most analysts believe it was the announcement by the Federal Reserve Bank and the U.S. Treasury that as much as $2 trillion in new Treasury debt must be printed and sold this year to finance the rescue of bankers who were staggering under the weight of reduced bonus pools. It was no help that President Obama piled on by announcing plans to spend another trillion or so to finance worthy projects such as the expansion of the Milwaukee Public School System, which has declining enrollment and more than a dozen schools already standing empty.
In short, there is a distinct Eau de Inflation wafting through the market atmospheres. Which brings us back to our original question: Will a trillion dollars flung helter-skelter at various "stimulus" projects and tax cuts/credits have an effect on the United States economy? Will it bring us the Hope of Change?
Indeed it will; major change is on the way. Let's take stock of the circumstances. All around the world, central banks are boosting money supply by issuing new debt in an attempt to jumpstart their slumping economies and stem the tide of job losses. At the same time, industrial, agricultural and mining outputs are falling.
BHP Billiton, Rio Tinto, Xstrata and others are closing mines and delaying projects because the prices of base metals and PMG metals have fallen too low to produce at a profit. Farmers are planting less cotton and other crops because prices are too low. Coffee growers in Central and South America are anticipating greatly reduced harvests because their access to sufficient fertilizer is crimped by lack of credit. With rising inventories, factories are cutting shifts and laying off workers by the hundreds of thousands, even millions. China estimates that 20 million workers have lost their jobs in the coastal factory belt and are returning to the poverty of the rural rice paddies.
On the one hand, we see money supply being boosted feverishly by national governments. On the other, we see the output of essential goods being reduced by weak consumer demand due to multiple causes: too much debt, declining employment, fear of the future.
What happens when the rising tide of money washes into the Stuff You Gotta Have store and finds the shelves looking bare? For illustration purposes, let's imagine a very simple auction: Jenny has a Barbie doll she doesn't want. Susie and Annie each want the doll, and each has one dollar. Jenny says, "I'll sell Barbie to whoever will pay me the most. Susie and Annie each offer $1. Jenny says, "I can't sell it to both of you. See if you can get more money." Each of the girls runs home and asks Daddy for a dollar, and both dads comply. Susie says to Jenny, "I'll pay you two dollars. Give me the Barbie." Annie says, "I have two dollars, too."
Jenny scratches her head. "Whoever will pay the most can have the doll." So Annie and Susie each run back and ask their dads for another dollar.
As long as the dads keep adding money to the auction, the price of Barbie is going to keep going up, because there is only one Barbie, but two little girls that want it.
Now, instead of two little kids and a toy, picture millions of hungry people competing for the same bushels of wheat and rice, and the same limited supplies of cotton clothing and natural gas. At the very same time, world grain inventories are at multi-decade lows, and Daddy governments keep adding money to the auction. If declining industrial output, declining agricultural output and declining mine output meet up with increasing Treasury output of money and credit, there can only be one result. And make no mistake; it is perfectly possible to have falling prices for investments and rising prices for essentials at the same time. All that's necessary is a lack of appetite for paper assets combined with a hunger for cornflakes.
Central bankers are operating under a terrible illusion. They think money and credit are the same thing, but they are not. Yes, money and credit spend the same, but they are two different animals. Money is spending power that was created by adding value, also known as work. If you do work that adds to total goods or services, you earn the right to consume goods and services. Money is the symbol or token of that right.
Credit is something else. Credit is a promise from a guy named Wimpy: "I will gladly pay you Tuesday for a hamburger today."
Unemployed people have lost their means of adding to the sum of goods and services. The bankers cannot fix that by giving them credit. The credit fix amounts to adding more dollars to an auction of insufficient goods. If the bankers had money they were willing to give out to hungry people, they might do some good in the world and thereby avoid Purgatory. But bankers don't have money; the only item on the shelves at the Fractional Reserve Store is credit.
The United States Treasury and the Fed have together embarked on a Voyage of the Damned. At the last FOMC meeting, the Fed Chairman seemed to anticipate the question, "What if there isn't enough demand for trillions in new Treasury debt?" Bernanke ventured to say that the Fed would buy "substantial quantities" of Treasury bonds toward the long end of the yield curve.
What Ben means is this: "If China and the rest of the world will not buy all the trillions of debt the U.S. Treasury must sell this year, the Fed is prepared to buy as much as it takes. We will make a market for long bonds."
This is not a good idea. It's called quantitative easing, and it's the equivalent of counterfeiting. It has destroyed currencies and governments galore. When you get a little short of funds, can you just write yourself a check for a trillion dollars? The Fed can, and they say they will.
The Fed's plan is simple: If China won't buy our bonds, we'll buy them ourselves. And we'll loan ourselves the money to do it with.
That, my friends, is not a remedy for a collapsing financial system or what the IMF has called a global depression. It is a recipe for monetary catastrophe.
Someone recently looked at the St. Louis Federal Reserve Bank's chart of the exploding U.S. monetary base and accused the Fed of burning the furniture to keep the house warm. For myself, I think it's more a case of burning down the house to keep the furniture warm.
Or burning down Main Street to keep Wall Street comfy.
Gabriel Gray