Alliteration ftw, amirite?

In the latest economics move, Ben Bernanke is trying to urge Congress to push through yet another stimulus package with the intent of jump-starting the economy. If Congress goes forward with this, I will lose almost all ability to have any faith in anyone in administration knowing anything about economics or history.

The scoop

Big news at CNN this morning is Benny trying to get Congress to move another stimulus package through. He had this to say:

With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate…

And, whats worse, is that Congress seems to be entertaining the idea:

Democrats have been pushing for a second stimulus package for months. Among the proposals they’ve put forward: extend jobless benefits, increase food stamps, invest in infrastructure projects and impose a requirement for a foreclosure moratorium.

Talk about a lack of understanding and direction. Lets look at some history.

History 101

About a year ago, an original stimulus package was getting put together. The plan was to kick-start the economy in hopes of rebuilding it and restoring faith in the markets. Individual tax filers got up to $600, joint filers got up to $1,200. The idea was that you would get some extra spending money and reinvest that money into the economy to boost sales and increase investing.

Here’s where the idea backfired and silly politicians became out of touch (they either blinded themselves of the results or were so convinced it would work that they didn’t need results to know it did). $600 isn’t shit. I can’t really buy anything for $600 that would equate to the economy getting “jump-started”. Did any politician really sit there and say to themselves: “We will give Americans $600 and with it they can put a down-payment on a house or a car or a $3,000 TV, etc.”

If they did, they are more stupid then I could ever imagine. Here is what I bet 70% of Americans did with their stimulus check: took it down to the bank and threw it into an account or payed off a credit card bill. Either way, this is NOT reinvesting it into the economy. In two non-reinvestment strategies, I just covered a majority of Americans.

Moving forward, we watched Congress push through a $700 billion dollar bailout that, to date, has had almost no effect. They switched the goal from buying housing investments to releaving credit stress. To date, neither has worked. Even if I ignore the AIG bailout, $800 billion dollars was spent trying to relieve the economy and nothing has worked.

Basic economics

I am no economics major and I won’t pretend I have the answer. I do, however, know one economics principle: The economy is vulnerable to a cyclic movement. That is, over a long time line, we see a sine-curve behavior in our economy that means we will see a number of years in high growth, and then a number of years in negative growth with recession and ascension in between. Perhaps someone on C. Hill should be reminded that perhaps a recession and depression are unavoidable due to market trends that no one understands.

Which brings me to point #2: no one anywhere knows how our economy works. It just does whatever it does and we analyze it in small chunks. Ask professional investors if there is a historical answer to what we see today and they will laugh at you. If markets acted predictably, everyone would invest because they would be assured monetary gains. Thus, if we don’t understand the problem, how can we create solutions?

Long-term backlash

The real problem here is that Benny and Congress are making long-term problems in favor of short-term solutions. Throwing money at a monetary problem seems logical in theory, but thus far in practice, it has panned out poorly. Neither the bailout nor the stimulus package has worked thus far, so why should anyone think that yet another stimulus package will help?

Here is what is more likely to happen: the money that has been dished out for bailouts and stimulus packages is not free. Anyone who thinks they got a free $600 for their stimulus package is SORELY mistaken. In reality, the $600 they gave you (which was actually yours all along – where do you think government money comes from?) will actually equate to negative money in your pocket on the long-term. The Federal Reserve, which issued your stimulus check, is governed by the same principles of interest that any other credit organization is. That is, the $600 you have is a loan to the American people that has to be paid back (every dollar out, must come back in), eventually. So, the $600 will actually cost you money in the long-term.

What this means is that if our economy doesn’t rebound and people don’t make extra money to pay it back, the stimulus package will just sit and collect interest (why do you think the national debt is $10 trillion and getting worse?). Eventually taxes will have to be hiked to pay it off but it will only sit and cost more money over time. In reality land, it may have been better to simply forgo the stimulus package all-together, given that it didn’t work.

Additionally, people hate raised taxes, but for every dollar that gets doled out as “free money” to “jump-start” the economy, there will be a dollar taken back in in taxes eventually. If you hate raised taxes, don’t let the government pass stupid plans that dish out money for free to people. The media will pass it off as a good deal for Americans, but remember that the government has to play by the same economic and credit rules as everyone else. There is no such thing as free money.