Thursday, April 12, 2012

Our creditors know this better than we do

Despite all the hoopla regarding an economic recovery, there can be no recovery until the economy sheds the excess debt.  The consumer is tapped out and is adjusting his balance sheet to reduce leverage. That is good, despite what the government wants (another credit bubble).
The so-called stimulus programs can mask economic performance for a limited time only. They may produce increased GDP reports in the third and fourth quarters, not unusual in the middle of recessions. The media and Bernanke have already proclaimed that recovery is underway. Supporters will only become louder if positive GDP stats show up soon. Do not fall for this hype.
The statistics will be hailed as confirmation of a recovery. However, they are merely statistics produced by government that have more to do with GDP methodology and reporting bias than real growth or real recovery. They cannot go on forever, and they do not produce real growth or balanced economic activity. David Rosenberg, in his daily eletter, exposes the effects of stopping such programs:
POST-CLUNKER ECONOMY LOOKING CLUNKY just reported that U.S. motor vehicle sales so far in September are running at an 8.8 million annual rate — a 28-year low and a 38% plunge from the incentive-induced 14.1 million tally in August. If this is what autos do, imagine what housing does once the $8,000 first-time homebuyer tax credit expires (if it does) at the end of November (not to mention what the Fed does in terms of extending its mortgage purchase program beyond the December expiry too — it has had a hand in financing 80% of all new mortgage issuance. But look at the good news — at least we will be able to see what the economy can do without the walker.
What is coming will not be pretty! If the government renews these programs or implements new ones targeted at other sectors of the economy, it may be able to produce a short-term effect. However, this “benefit” is only created by pulling demand forward. That is, it pumps up current results at the expense of future results as Rosenberg discussed above. Even if one were to (erroneously) argue that these programs did some good, we are fast approaching the limits of what can be done. Each involves government subsidies of one sort or another. As such, each involves widening the deficit and increasing Federal debt, whether it be via tax rebates or increased spending. There is a limit to Federal debt. We have already passed the tipping point of being able to service government debt and promised social benefits. Our creditors know this better than we do and periodically scold us for our fiscal irresponsibility. We have become the Blanche du Bois of the world

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