Recession Part II: watch for it

Around the world pundits are breathlessly announcing that the Great Recession of 08/09 is finally over. There’s even an argument among economists whether the recession ended in May or June. Statistics Canada gleefully announced that in June the Canadian economy grew by 0.1% and predicted a “bounce” in July. Other nations are following suit, as they note a slight improvement in economic outlook and a cessation of contracting GDP.

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Supporters of the Keynesian concept that heavy deficit spending by governments can stimulate free market economies and shorten recessions are grasping at straws. It’s one of those ideas that looks good on paper and sounds great if you don’t know what else to do. But there’s one small problem: deficit spending doesn’t work very well in a microcosm, say a family whose credit cards get cuf off the moment they get in too deep; I can’t imagine it working any better in a macrocosm like a global economy. The so-called stimuli initiated by the Bush and Obama administrations have to be funded by something more tangible than paper. The $787 billion “stimulus spending bill” passed recently, of which only about 12% is actually set aside for “stimulating the economy” and the rest is pure Democrat pork, is done largely with borrowed money. All the other spending that the Congress is promising will also have to be done with borrowed money. This year alone the US government will have to borrow 41% of all the money it plans to spend, while spending commitments for subsequent years are even greater.

Carter administration, whose ineptitude was legendary

Treasury bills and government bonds no longer look as attractive to foreign investors as they did say, five years ago and the US government is having no small challenge raising the money for its profligate spending. But as lenders are less certain about the US government’s ability to repay its debts, they are making up for that uncertainty by demanding higher interest on the loans. As the US national debt approaches 100% of GDP it will become ever more difficult for the government to raise money in the form of loans. So they will have no choice but to just print the money they need, which is where we are right now. As more money goes into circulation, the value of that money declines, spurring inflation. With inflation comes a steep rise in interest rates that will spread through the economy like wildfire, as central banks act to combat inflation. Many readers likely do not recall the last time Americans faced the double whammy of 13%+ annual inflation and mortgage rates in the 23 percentile range. Ironically, these conditions precipitated a deep recession that started under the auspices of the Carter administration, whose ineptitude was legendary. The recession brought on by Jimmy Carter was longer and deeper than what he have currently undergone, as key economic sectors failed to recover until well into the Clinton years. The Democrats’ chickens will come home to roost with a vengeance, as no nation, large or small, has ever been able to spend itself into prosperity.

Crackpot economics

Some of the individual programs initiated by the Obama administration will actually hurt the economy in the long run. The “Cash for Clunkers” initiative that saw American taxpayers subsidize new cars sales with incentives up to $4,500 each is a case in point. The thinking behind this program is that it would get old gas-guzzling vehicles off the road and it would at the same time stimulate the automobile sector. What it actually accomplished is debatable. For instance, the $3 Billion program encouraged individuals with a perfectly serviceable asset to destroy that asset and purchase a new one, paying for it in part with taxpayer money. As the Wall Street Journal (WSJ) so eloquently points out, this program did nothing to enhance the overall wealth of America, as it merely took funds from one group of taxpayers and arbitrarily gave them to another group. But worse than that, it affected a myriad of spin-off businesses adversely. Among these are used car dealers, mechanics, body shops, etc. And the 690,000-unit bounce that the automotive industry saw in July and August will reduce vehicle sales in the fall, which is when auto sales traditionally go up, as demand falls off with the cessation of the program. In a simple and eloquent sobriquet, WSJ calls it “crackpot economics”. Now the Obamites are talking about repeating the cash for clunkers fiasco with home appliances. Throw away your perfectly serviceable, but old washer/dryer/fridge/stove and the government will give you money to help buy a new one. Again, there’ll be a brief spike in the sales of durables followed by a drought in the industry. It’s clear that when it comes to economic policies the Obama administration is in so far over its head that it’s drowning. And insofar as the promise of not following the same policies of the previous administration that “got us here in the first place”, it’s a pipe dream pure and simple as economically, Obama is following the same pattern that Bush followed, except the numbers are a lot bigger. What’s more, in some cases Obama is getting advice from some of the same individuals that Bush consulted. If you’re thinking that happy days are here again, I feel badly for popping your balloons, but truth is, this is the eye of the hurricane. Just like FDR’s policies prolonged the Great Depression of the 1930s, so will the policies of this administration prolong the misery through which Americans are going today. One doesn’t have to be a Nobel Prize-winning economist to see what’s ahead. It’s a little thing called common sense.