Friday, June 12, 2009

The $18,100,000,000 question

The numbers are staggering…really incomprehensible…it’s the kind of stuff that if you made it up no one would believe you…I’m talking about the amount of money both the US• The US government and Fed spent or lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.
• European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany ($3.3 trillion).
If we break the US spending down to per person living in the US, we get:
$12,800,000,000,000 divided by roughly 304,000,000 = $42,105 per person
Now I know what you’re thinking; if our government, in its infinite wisdom simply doled out that much money directly to every man woman and child, you can bet our crisis would be solved. Heck, in the Crooks family alone, four kids, my wife, and I would have racked up a cool $252,630! Granted, the kids would want their pound of flesh given that all are of age, but still, we could have paid off a whole lot of debt and bought some pretty cool toys with that, deleveraging and stimulating along the way. And I bet you a dollar to a donut that I could more efficiently spend that money than some government agency that’s only trying to “help” me by saving various dinosaur financial institutions and companies throughout our fair land.
Before I went off that tangent, I was going to say that what is really quite amazing is that with a total of….
…committed by the US and Europe, one wonders about a couple of things:
1) How in the heck can banks screw up so catastrophically? Still an open question.
2) Why in the heck don’t we have ragging inflation by now? Still an open question.
When you consider that other governments besides the US and EU (China has been busy along with Japan, Brazil and Russia) are into the money pumping game, and we haven’t seen a whole lot in the way of global traction in demand, and even more surprisingly we haven’t seen any inflation per se from the “growing” countries, it has to make one very nervous.
In fact, as John Ross pointed out yesterday, we keep seeing deflation instead. Just today, as highlighted in the key news above, German wholesale prices fell 9% in May from a year ago! Say what? Yikes!!!!
And did anyone notice US consumer prices went negative year-over-year for the first time since 1954! Yikes!!!!
And Japan is getting bear hugged again by deflation despite being stimulus gurus. Yikes!!!
This is a subject we have been harping on for a while and it goes to the point that there must be still massive amounts bad paper still on the balance sheets of a lot of institutions everywhere, not to mention private balance sheets too. This goes to the point of why this incomprehensible amount of stimulus is not getting the requisite traction, despite signs of hope and glee flowing from some of the emerging markets, which we don’t deny. But for a global recovery, we still think we need places like the US, Europe, and Japan to recover, don’t you?
When you look at the numbers, it’s easily understandable why many expected hyperinflation once there is even a modicum of traction.
Inflation is, and always has been, the preferred route out of trouble by governments past who issued too much debt i.e. inflate away the debt problem by paying it off witheven more worthless paper. This is why you might have heard bonds referred to as, Certificates of Confiscation.
The scary part about what’s going on now is that governments present are running out of trees to cut down so they can print more paper in their vain attempts to conjure up a little headline inflation; it makes them look very bad compared to their inflationist counterparts past. A pathetic performance indeed it is. Mr. Summers, put down that Diet Coke and get going buddy! We still have plenty of trees in our neighborhood, and I’ve even seen a few around Washington. No excuses!!! In fact, if we really cared about our country, we would each donate a tree to help out our Treasury. It is the least we could do for all they do for us.
Do you notice why our government is having so much trouble achieving their goal of inflationism?
If you said Velocity of Circulation, you would be correct! Congrats! For those of you not versed in such arcane jargon, and be very thankful you are not, let me put it this way:
You can lead a horse to water but you can’t make him drink!
If you and I are very worried about our future earnings disappearing because our companies aren’t doing so well because there is little demand for its products or services, which represents most real people I know, then we are not predisposed to heading out to the store to find something shiny new to buy for us or our loved ones. Multiply this human action, which by the way is the title of the best book on economics ever written, by Ludwig von Mises, over and over and over again amongst the US population that does not either work for, or do business directly with, the US FederalGovernment, the only place with booming growth, and you can see why the Velocity of Circulation of money is falling, off a cliff.
And this goes to one of the major problems, I think, for all those neo-Keynesian economists that keep flowing from the woodwork to tell us we need more spending:
Econometric models still have a little problem with human action. They have a little trouble measuring, what they would say is “irrational behavior.” But those of us that live in the real world would call it quite rational behavior. When we are nervous about the future we make a logical decision to change the way we act with a thing called money. We viciously cut waste out of our budget. We change our spending habits dramatically. Our incentive system adjusts accordingly.
And when we watch our government commit $42,105 for every man women and child to “help” us, and eat away at the stored wealth built up by hard working Americans past, it makes us even more nervous. Thus, what the neo-Keynesians see as a rationale response, we see as incredibly irrational. And thus, we decide it’s time once again to reduce the Velocity of Circulation of our money.
Thus we end up with a self-reinforcing nasty feedback loop created by people who actually believed everything Keynes said in the General Theory, instead of moving on to von Mises Human Action and getting it right. And so it goes.
Jack Crooks
Black Swan Capital LLC

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