A
$145 billion Dollar Cup of Irish Coffee
A Look at the Government's Economic "Stimulus
Package"
John Riley, Chief Strategist
01/19/08
It is apparent
even to the most optimistic sycophants on the financial channels
and on Wall Street that we are slipping into recession. (Make that
have gone into recession.) It is of our own making. The Sub-prime
mess will get much of the blame, but debt is the real culprit and
until the debt problem is resolved, the problem will only get worse.
But thanks to
the Government's "Stimulus Package" , we are all going
to get $800 bucks to make us feel better. This is tantamount to
the bartender giving you a cup of Irish Coffee, on the house, before
you head out to your car, drunk from a night of partying that lasted
way too long. The bartender consoles himself in the false thought
that the cup o’ Joe will wake you up enough to get you home
safely.
What an idiot!
Instead of keeping you from doing something really
stupid, (drunk driving), the bartender gives you more booze, disguised
as a cure - coffee. It won’t work. You are still falling down,
oblivious to the world, stinkin’ drunk. And only a lot of
time and pain, (the hangover, or in economic terms - a recession)
will get you sober.
For years I
referred to Greenspan as the bartender and debt as the drink of
choice. Bernanke is just a new bartender, ready to pour a glass
full whenever you ask. (See the
Fed Buys a Round)
The planned “Stimulus Package” is nothing
more than a cup of Irish Coffee for a drunk economy. When you boil
it down, it is nothing more than more debt, to solve a debt crisis.
(Choose your crisis –Sub-prime, consumer debt, Mortgage debt,
Muni debt, Current account deficit…) Everybody knows the fastest
way to sober up is to have another drink! (The real answer is “NO!”
for those of you that might not get the dripping sarcasm.)
What
Are You Gonna Do With Your 800 Bucks?
This is, acknowledged even by the planners, nothing more than a
short term fix. Everybody gets a check for $800 and goes and spends
it. That’s the plan. This shot of new money into the economy
might get it over the hump and avoid the dreaded recession.
The fear is that everybody squirrels the cash away
in the bank or, Heaven forbid, pays down their credit cards. This
gives no bump. This doesn’t help the economy at all, in the
short run.
But from what bottle are they pouring this magical
elixir that is supposed to stave off recessions. It looks like they
are mixing in a well aged spirit into our coffee. More debt.
Where do the
supporters of this plan think the money was coming from? Does the
Government really think that we are so dumb that we believe they
have accounts full of cash with our names on them that represent
the taxes we’ve paid the government and that they are just
taking this excess cash and giving it back to us?
The Federal Government is running a deficit. There
is no excess cash. There is no account with your name on it. (Except
at the IRS, where they seem to somehow know every penny you earn.
Better declare that income from selling those Girls Scout cookies!)
To get the $800 bucks into consumers’ hot little hands, the
government is going to go deeper into debt. Hooray for part 1 of
the plan! Don’t you feel better already?
The second part of the plan, which will get less
play but may be more important is the part targeted at businesses.
This will come in the form of tax incentives, guaranteed loans and
other inducements to get businesses to make major capital expenditures.
This increased spending, it is hoped, will give the economy some
lasting strength.
The details will be hashed out in the weeks to come,
but here’s how the parts of the plan play out. Tax incentives
mean less taxable income for the Feds. At a time when we are running
a deficit, this means the Federal Government is financing this part
with more debt. Subsidized or guaranteed loans are more debt at
the Corporate level. More debt is more debt. And that is the last
thing we need.
Lower interest
rates are also part of the overall plan, but since they are not
a direct part of the plan, we will discuss their impact and why
they won’t work in a separate article here: Risk
Costs.
Couldn’t
you see this coming?
For weeks, I have told investors that I anticipated the government
would do everything they could to stave off the inevitable downturn
until after the election in November.
The plan has bi-partisan support because both parties
realize their chances of getting their guys elected get worse if
the economy is in a tailspin come November. Those in power are afraid
of the “throw the bums out” mentality and those out
of power are afraid that the electorate will be too scared to put
a new guy into power at a time of crisis. (No, its not rational
to hold both positions at the same time, but this is politics.)
There is also strong incentive from the White House
to push this problem onto the next guy, whomever he or she might
be. The last thing a President wants is to hand the keys of a failing
economy over to the next guy. Ruins your legacy.
The Federal Reserve wants to push this out as far
as possible if only to show that they are as creative as the previous
Fed chairman at smoke and mirrors, economically speaking. The last
thing this Fed Chair wants to be known as is the guy that dropped
the baton Greenspan had carried for years.
Ya Gotta
Have Faith
Our economy is based on the faith of people involved. They believe
that America is the greatest land in the world. They believe that
anybody can become a success here. They believe that the American
economy will survive and thrive in the future. None of my skepticism
questions these articles of our economic faith.
But it is not a blind faith. The problems facing
the US economy cannot be fixed by simple tax tricks, loans and $800
allowance checks from our Federal daddy.
Nothing they are proposing or can propose solves
the Real Estate crisis. Nothing they are proposing will reduce the
amount of debt in our economy. Nothing they are proposing reduces
the inflation rate, it makes it worse. Nothing they are proposing
gets people out of debt and reduces the economy’s dependence
on debt growth.
Conclusion
Maybe it will work in the short run. Maybe the stimulus package
will give the economy the bump that both political parties need
and then they can go into the election claiming credit for the boost
in the economy and victory for their constituents.
But when the dust of the election settles, we will
be left with even more debt, a real estate market that is still
struggling and all of today’s economic problems staring the
new administration in the face.
And if it doesn’t give the economy a bump?
Expect another stimulus package in the summer.
Investment
Implications
More debt means higher interest rates at the long end. Investors
would be wise to lighten up and shorten their bonds holdings.
They also should hedge their Dollar positions with
strategies to benefit from a declining Dollar. A declining Dollar
will also likely ignite more inflation. Gold and commodities are
the answer there.
Fortunately for our clients, none of this is a surprise
to us at Cornerstone. Our portfolios are already structured to benefit
from the wonderful scenario described above.
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