|
Insanity is often defined as repeating the same action while expecting
a different result. Recent Congressional activity to push through this
year’s second economic “stimulus” package certainly
indicates that many of our political leaders may have special needs.
Responding to the $150 billion stimulus that was passed at the beginning
of the year, I made the following observation in my February 15th commentary Upping the Inflation Dosage : “The
failure of the stimulus plan to cure the economy will cause the Government,
and the Wall Street brain trust, to conclude that it was simply too small.
Their next solution will be to administer an even stronger dose.”
It’s interesting to recall that at the time, just 9 months ago,
the $150 billion package caused much hand wringing, especially from
Republicans still clinging to notions of Federal restraint. This was before
an avalanche of more than $2 trillion in new spending initiatives -- before
Bear Stearns, wide open discount windows, AIG, Fannie/Freddie, Federal
Mortgage Auctions, Detroit loan guarantees, and preferred shares in the
banks. In retrospect, the $150 billion stimulus seems quaint. It is not
surprising that the latest package is expected to be twice as large. When
this one fizzles, look for “Stimulus III” to be even larger.
The problem with our Government’s version of economic stimuli is
that it encourages the very activity that brought our economy to the brink of
financial ruin in the first place. Quite plainly, the goal of all these plans
is to give consumers more money to spend. However, excess consumer spending
is part of the problem, not part of the solution. After a decade long
spending orgy, market forces are finally trying to restrict consumer spending
and dampen credit. But the stimulus looks to provide a new source of funds
after savings, income, and credit have been exhausted. Our imbalanced economy
is in desperate need of retrenchment, but stimulus plans will effectively hold
the firemen at bay while throwing gasoline on the flames.
Politicians may say that the plan is not all about consumer spending,
but is designed to fund investment. But investments conceived and executed by
governments, and guided by political considerations rather than profit, often
yield poor returns. The clumsy hand of the state is no substitute for the
invisible hand of the free market. In addition, public sector
“investment” often soaks up much of the capital which otherwise
would have been available for more efficient private sector uses.
If the government were sitting on a pile of foreign reserves, then at
least a stimulus plan could make some economic sense. But of course,
that’s not where the money comes from. To finance their largesse, the
government either borrows more money from abroad, or gets it from the Fed,
which simply creates it out of thin air. Either way, we undermine our economy
with additional debt or inflation.
Unfortunately, the one stimulus we do need will not be supplied. To
fix our current economic mess we need to diminish the activity that
undermined our economy and encourage the behavior that will restore balance.
Instead of encouraging Americans to go deeper into debt to buy more foreign
products that we cannot afford, Americans should be encouraged to save their
money, and produce more goods for export.
Fortunately, no government policy is needed to achieve this. Market
forces would produce such incentives on their own. Higher interest rates and
tighter credit world force people to borrow less, while simultaneously
rewarding those who saved. A falling dollar that would eventually result from
a recession would diminish our capacity to import while helping to restore
our global competitiveness (provided it was accompanied by lower regulations
and taxes) in manufacturing. Of course a lower dollar is not a good thing,
but unfortunately it is the necessary consequence of our past profligacy.
Market based solutions would not be painless, which is precisely why
our leaders resist them. However, as the saying goes, “no pain no
gain”. If we ever expect to make any legitimate progress, a higher pain
threshold must be accepted.
If our elected officials really were concerned about easing the burden
on consumers, they would be looking for way to reduce government spending. If
government was less expensive, taxes could be lowered across the board. The
only way for American citizens to spend more is for their government to spend
less. Unfortunately, our government and the leading private economists
believe that everyone can spend more without any serious consequences on the
downside. It’s a comforting idea, but it’s a lie. The truth may
not be pretty, but it’s the only path towards a sustainable recovery.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free:
888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the U.S. economy and
why it is in so much trouble, read my new book “Crash Proof: How to
Profit from the Coming Economic Collapse.” Click here to order
a copy today.
More
importantly make sure to protect your wealth and preserve your purchasing
power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free research report on the powerful
case for investing in foreign equities available at www.researchreportone.com, and subscribe to my free, on-line
investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
| 
