What is Stinulus and why it failed- and why itll fail again
Topic: Economy, what's left of
Obama and CONgress attempted two "stimuli" or singular, stimulus, which means an attempt to "spend money" to make the economy improve.
It hasnt worked TWICE and QE3 is about the same failed experiment a THIRD TIME.
The first two resulted in, in rough terms, another 6 TRILLION DOLLARS IN GOVT DEBT.
Thats enough to trigger default.
Guess what QE3 will do?
"Stimulus" was an attempt at "capital injection" into the circular macro economy.
That definition alone evidences why it was doomed to fail, regardless of the Liquidity Trap.
"Capital" is something of value, we usually say "money" because thats how Consumers perceive it, we get a paycheck and can go to the bank and get some money (cash) or pay bills, which does not use "money" to exchange capital (liqiudity) for some goods or services (checking account debit to pay electric bill).
"Liquidity" is a sub-set of "capital" (I may not be using the precise Economic definitions, but none of us are presumably economists, and you can look up the exact definition in an Econ book) which is 'capital available for use' Water is liquid, ice is not, but adding heat makes ice liquid. "Ice" is not "liquidity" as, just assume, money in checking reserved on ledger to pay the electric bill is not "liquid" as the debt for electric service has eliminated its liquidity.
Crude, but think with me here...
Why would the "economy" need "liquidity?" Dont the banks have more deposits than they know what to do with? Cant Government print money and introuduce it through NORMAL economic channels?
No, because those arent working, thats why the desperate Keynesian measure of helicopter drops of money into the economy.
The problem is the definition of "our economy." That is, a free market (not government controlled) macro-economy (large scale considering every input and output to the economy) in a CIRCULAR MODEL. The last part is why stimulus can never work in America.
The circular model works by a coal mining company hiring miners to produce coal. Coal has value to a power plant operator who burns it to , NOT make electricity, but to "power boilers that make steam to turn generator turbines to generate electricity that goes across the power grid that is used in your home."
The part in quotes examples the nature of a cyclical economy. At every point, there are buyers and sellers, each step, presumably, buys an asset or commodity (coal is a commodity) and in the process of making an output, makes a little PROFIT.
The consumer, when transacted the checking debi, receives the output from that process as electrical service to heat the house and run the refrigerator.
T he money to pay that bill doesnt fall from the sky in the circular model, it is earney by the homeowner working in the coal mine, which completes the CIRCULAR cycle.
The RATE at which that cycle moves is VELOCITY, which in the US, is dang too close to ZERO.
Stimulus is an attempt to "inject capital" into that cycle, which is not moving, in an attempt to make it move. It cannot for several reasons:
1.) money the Government takes in, or prints, has no connection to the cyclical economy. Yes, it can benefit the coal plant in buying coal, but that actually DECREASES the velocity, because that cuts out the part of the cycle from homeowner as coal mine employee making money through the BANKING SYSTEM. If someone gives the Employee the money (welfare) then he didnt work for it, his company did not invest money and profit from the process to then pay him to then pay the bill.
Heard of bank bailouts lately? Consider every part of this cycle, then why the Government DIDNT "bail out" any of the players EXCEPT the banks.
2.) that capital results in less tax income to the Govt, because less circulation = less tax revenue. Realise that taxes are incurred on every step of the process, for example, a factory holding stocks of partially completed automobiles, thats taxed just as the auto sale when completed.
3.) there is less "incentive" for the workers and business owners to participate in the circular economy. They got money for free, why should they expend labor to get it? That would be money wasted.
Since stimulus actually COSTS tax revenues to Government through an overall economic slow-down, why do it? Doesnt that mean theres no way to pay that stimulus back?
Thats EXACTLY where we are now. They wouldnt do it, except not doing it must have a worse outcome. That worse outcome is obvious considering Government only has one revenue souce, STEALING TAX MONEY FROM YOU and every step of the circular process- it means revenues are down more than the probable losses with stimulus.
SO, they kick the can down the road, piling on hugely more debt with no way to repay it.
Why should the free market economy pay that debt back if it didnt contract for it? Or, more importantly, why shoud those of us who DIDNT contract for it , pay it back. If the power plant needed stimulus to keep its doors open to make electricity, then they should pay it back from future profits as a loan.
Except the jackasses in DC threw it all away on bad debts. GM didnt pay off, Chisler didnt pay off...banks took the money and invested it overseas...
Total disaster.
If there's no real connection between this money wasting machine Obama is cranking, and the real economy, who cares?
"Who" does care, because the Government has no way to pay the debt back aside from robbing it in taxes.
But they arent rasing taxes, so how wil they repay it? This is where it gets ugly.
Friedman faults the ordinary man for refusing to look at the real value of money, what it can buy and its overall economic worth, instead, only looking at the "nominal value of money" or, basically, whats in my hand today. Thats a disastrously short view, and key to why many businesses fail.
The economy is broken to not generate tax revenues. GM, not making cars, cannot pay taxes. So, Government must use sneaky methods that the ordinary man doesnt perceive, and thats through clever tricks like currency debasement and inflation.
The nominal value of money is more or less 'a one dollar bill is one dollar'. I can take that bill to the bank and get 4 quarters. Thats of no value. The real value is over time, what can I do with that dollar? Can I save it and earn interest (not now) or spend it now on milk since milk is a good price, or should I buy POWDERED MILK for storage of value, because the price of milk will go up in the near future?
To pay this stimulus debt off without tax income, the Government must do one or many things:
1.) cause inflation to cause the value of the debt to go DOWN, because its repaid in money that is worth LESS. That is counter intuitive to the ordinary man, but take it for granted..Paying back with worth-less funds means there was more or less a REVERSE TRANSFER of value.
Inflation raises tax levels, which increases the Governments income, but you may not realize it in the 'income creep" which results in "tax bracket creep" or higher taxes on milk etc. But since your wages also go up, this complex THEFT goes un-noticed.
INflation also tends to increase INTEREST rates, which is BAD for a debtor, because that means a larger sum must be repaid. Thats why interest is as close to zero as they can manage, and why DEFAULT is so bad-it wil certainly cause the lenders to increase the interest rate on the debt, and they cannot pay it NOW.
2.) Debase the currency. Instead of inflation, which increases taxes and interest, (which is shooting oneself in the foot) destroy the value of the dollar relative to other assets of the lender. Since the "lenders" tend to be overseas investors whose currency values cna change with respect to the dollar, debasing the dollar makes the debt worth less.
It also SCREWS YOU since any liquidity you have saved is worth less. The money you have in the bank can now buy FEWER goods and services, not more. You then, in fact been CONNED into paying the debt back, instead of the Government.
And thats what Ive been saying for a year now, the debt is PHONEY and they are screwing you into paying it back FOR THEM, when you did not CONTRACT for the deb and got nothing FROM IT except a weaker economy.
Your goods on hand, although, are worth the same or MORE because you dont care what the money is worth in respect to those goods/services, since, like me, you dont buy things. Ive invested LABOR into restoring two old vehicles, thus, I have not given GM and Obama my money in spending upwards of $100,000 inculding interest, on two NEW vehicles (dont want that JUNK anyway)
Forget this hysteria about planting a garden and storing water,(although all that is not necessarily hysteria, there are reasons to have extra food on hand) you cannot escape those costs for the most part, but concentrate on the big ticket items such as cars and houses- things getting more expensive due to dollar devaluation.
But, doesnt you not buying a car ("buy American" hysteria) somehow hurt the economy?
No, and thats the economic ignorance Obama and CONgress are playing on (as well as many CONservative pundits) who have failed to get any economic education, and fall for the fallacy that a single part of the system somehow comprises the entire system, and with that, were back to the DELUSION that somehow a single point entry to the sysstem (injection of stimulus capital) somehow constitutes a positive effect on the economy.
It doesnt, you dont and cannot. Save your own ass...
And now, a real example. I just ate green beans that came from our garden. Most people might see that as saving money, since we didnt go to the grocery store and buy the beans. We saved money by not incurring more vehicle expenses, in wear on the vehicle and gas to get there.
WRONG. We LOST money in the short term by eating beans from our garden, and knew that when we planted, harvested and cooked them. The problem is that here where there is litle rain fall, we have to spend MORE money to wate the garden than the beans are worth, especially since the crooks in City Government charge sewer fees for irrigation water to water the lawn and garden. We find the cost increase beneficial in having a little extra food source (if all the grocery stores suddeny burn down, we can eat from the garden and then dont care what the water costs) and having a nice activity (planting and tending the garden) with beneficial exercise, instead of throwing money away on an Alaska Cruise (although the cruise operator probably doesnt see it that way)
The biggest payback from the garden is WORK ETHIC which pays many-times benefit in using free labor to fix the car, and search the papers and Goodwill for used merchandise (like furniture) instead of buying new, or worse, buying new with interest, or, the height of stupidity, going to Rental Center where the REAL professional thieves lurk to not only steal people blind, but knowingly steal the POOR blind.
This lack of understanding of how money works is why too many Americans are eternally poor on credit cards, get involved in failed businesses and and up funding the Governments debt scam.
The massive damage to our Society comes when people realize they have an easier time on Welfare- that is- until the money runs out...
Posted by Dave
at 4:02 PM PDT
Updated: Sunday, 31 July 2011 4:38 PM PDT
