Stock markets have taken off this morning. Over the weekend, President-Elect Barack Obama pledged “the largest infrastructure-spending package since the 1950s to stimulate economic growth,” reports Bloomberg.
And despite ticking off the car manufacturing industry’s “repeated strategic mistakes” and its “failure to adapt to changing times”, he still says he doesn’t think “it’s an option to simply allow it to collapse.”
So it’s a case of bail-outs for all. But can the US afford it?
Obama’s economic policies look very familiar
It’s not as if they needed it, but last week Americans got a brand new reason to be glum about the state of their economy. On Friday, the US announced that the economy lost half a million jobs in the month of November. That was the largest drop in any single month for 34 years. Unemployment now stands at 6.7%.
For most people, a recession doesn’t really start to hit home until their job is under threat. The reality is that if you can earn your way through a recession, then it’s not a life-changing event. Yes, your house might fall in value. You might even end up in negative equity. You’ll probably have to prioritise paying down your debts, and maybe cut back on a few luxuries. But if your salary was roughly meeting your outgoings before the recession kicked in, then you should be OK.
The problems start when you lose that income. And so rising unemployment is the point at which people really start to worry about the state of the economy.
So it’s perhaps no surprise that the day after the awful data arrived, Mr Obama wheeled out his big plan for saving the American people. Mr Obama might have been hailed as a breath of fresh air for the US, but his economic policies are remarkably familiar. It seems there’s no problem that can’t be solved by chucking a load of free money at it.
He’s proposing government programmes for bridges, roads, broadband internet and schools, and plans to improve energy efficiency and spending more on health. All good, useful stuff, particularly in a country whose infrastructure has gone begging somewhat in recent years.
Sacrificing the long term for the short term got us into this mess
But there’s the small issue of cost. His advisers reckon that the plan will cost more than $700bn, and “could even top $1 trillion,” reports The Telegraph.
Wow. That’s a lot of money. Still, this is America. They’ve got that kind of money, haven’t they? Actually no. The US budget deficit looks set to top $1 trillion dollars shortly, perhaps even before Mr Obama gets into power.
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But don’t worry about that, says Mr Obama. No sense in fussing about the deficit now. “We understand that we’ve got to provide a blood transfusion to the patient right now to make sure that the patient is stabilised. And that means that we can’t worry short-term about the deficit. We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”
It’s all very well saying that – and Mr Obama can hardly be blamed, as he’s far from the first politician to rely on spending to get himself out of a hole – but sacrificing the long term for the short term is what got us into this mess.
Every problem we’ve had has been solved by cheap money. Interest rates have been slashed by central banks at every hint of trouble. The tech bubble burst, we saw interest rates fall to 1%. There was a deflation scare then, too. But the housing bubble inflated on the back of that cheap money, and inflation picked back up as speculative money flooded into assets from stocks to commodities.
But now interest rates are pretty much as low as they can go, and regardless of how hard they try, the government can’t get the broken banks to lend. So now it comes down to governments around the world to step in and ‘save’ capitalism from itself.
How is this stimulus package going to be funded? We don’t know yet – but we imagine that it might just be funded courtesy of the Federal Reserve’s printing press.
This can all be justified in the short-term – you can justify anything in the short-term. But when all this money starts to have an impact, it may be a lot harder to mop up the mess that comes afterwards. People in America, with folk memories of the Great Depression, might think nothing’s worse than deflation. But people in Germany, with folk memories of hyperinflation, and the poor people in Zimbabwe, who are living through it, might beg to differ.
We have more on the likely result of all this money-printing in the current issue of MoneyWeek (if you’re not already a subscriber, you can subscribe to MoneyWeek magazine).
In the meantime, Mr Obama’s stimulus plans may finally result in the much-anticipated pre-Christmas rally getting underway in stocks. But with weak data on the US economy likely to keep coming thick and fast, I wouldn’t bet on it lasting for long.
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