The Federal Stimulus - Anticlimax Turn On

The world is a complicated and integrated place. As Chaos Theory says, a butterfly in North Korea can flap its' wings and a tornado of words then blows across  America from sea to shining sea.

However,  our policy deciders in Washington don't seem to understand this. Though doing  the same errors made in the 1930s depression, they think the same solutions that were effective then, will work today.

An example of this is the cash for clunkers program, which is Uncle Sam paying you money to buy a car. Evidently Obama and Congress haven't been to Detroit lately, and still think cars in America are made 100% in America. This is not the case. Most car production in the US is done outside America. The principle beneficiary has been Mexico and other countries.

Guido remembers a few years ago being in the Southwest US < a nice place where men are men and the women wear the pants > having to stop late at night by a train crossing. Car load upon car load of  freight  cars passed filled with new autos. The woman beside him said this goes on every evening. Trains travel down to Mexico empty and come back loaded with new automobiles. So much for NAFTA benefiting the US.

Today on September 10, America is suppose to have the worse trade deficit in years. The main reason, some guess, being record imports of cars, machinery, etc.,  It looks like this is where much of the stimulus is going. To widen Americas deficits, employ foreign workers, and make the dollar a more fragile currency, if that's even possible.

It appears the main beneficiaries of the stimulus in America  have been state and local government workers. Which is a laudable thing to keep people employed , as long as you get rid of the deadbeat public workers  < which many good gov workers wish was done before this economic emergency >.

Another factor of the stimulus seldom discussed, is how little of it has been spent so far. After all,  wasn't that  partly the idea of having such a massive spending program enacted in the first place. Mr. Depression was going to be blitzkrieged with a massive barrage of money. As mentioned elsewhere on this site, so far only about 15% has been spent.

Why?

Guido suspects it's because they cant get the funding. You see in order to spend money they have to take or get the money. Take means taxes and that source is imploding due to more people being impoverished. Getting means borrowing. This is being done in dribbles, my guess being  <1>  there is little money available out there worldwide, and <2> other Central Bankers warning Bernanke not to create a currency crisis with an avalanche of dollars.

What also hasn't been considered with all this public borrowing, is what happens in the other credit markets. What happens to private borrowers? Evidently, news stories say, banks aren't lending to them because they're considered a bad risk. Guido suspects it's because banks also would prefer to buy all those T Bonds out there at a guaranteed spread. As I've said elsewhere, this also happened in the 1930s depression. It's called the liquidity trap.

But the banks are stuffed with Free Reserves < excess liquidity to lend money > , some would say. Again Guido suspects part of  Free Reserves includes Treasury obligations.

Perhaps we can see how this is interrelated. Credit contracts, the Fed Gov and Reserve borrow to replenish bank capital, banks use this capital injection to buy the same T bonds used to bail them out, the private sector is starved for credit. Or there's incentives to buy cars, only cars aren't manufactured in America. Like I said, it's a complicated world. Evidently too complicated for Larry Summers.

"Hoover put all the money in at the top and it never went anywhere. Roosevelt put it in at the bottom and things stopped falling" - Anonymous