STIMULUS IS A BAD IDEA
By Jack H. Swift, Esq.
February 8, 2009
NewsWithViews.com
You Can Protest the Stimulus package here.
Congress is poised once again to do what it does best. It is going to spend astronomic amounts of money it does not have. From a debt perspective, this can only make our current economic problems worse.
From our founding until 1981 our government only managed to accumulate $1 Trillion in debt. Since 1981, our modern Congress has added an additional $9.6 Trillion. Without consideration of the bailout program and this proposed stimulus plan, the government’s debt was 70% of our annual gross domestic product. The annual interest on this debt is an annual expense in excess of $400 billion. A staggering 45% of that government debt is owed to foreign nations.
If the underlying problem to our economic situation is fundamentally one of insolvency, adding additional debt service obligations can only compound the problem. We cannot borrow our way to prosperity.
Senator Shelby of the Senate Banking Committee observed that Congress can’t hope to fix our economic problem until Congress figures out what the problem is.
Initially the American public was told that the problem was one of inability of our banking systems to provide adequate credit availability to fund our commerce. Congress, against the wishes of the American public, borrowed $800 billion to give the banks and financial institutions. This did not cure the problem. It failed because a lack of credit availability wasn’t the problem. Ford and General Motors shut down their 2008 model production runs six months early not because of a lack of financing for orders for new cars. The problem was a lack of orders. This was months before there was any word of any credit crisis.
The word now is that the fundamental problem is one of lack of confidence of the consumers. They are reluctant to undertake more financial obligations in view of an uncertain economic future.
There is a lot of merit to this argument. Way back in the days of the OPEC oil embargo I was engaged in auto sales and I saw a definite correlation of sales to a lack of current bad economic news. But it misses the real point at issue in our crisis.
Prior to the downturn in our economy in the 1970s, automobile financing was generally limited to a term of 36 months. This was well justified on the basis that the depreciation of the asset being financed occurred so rapidly that financing for a longer term wound up an unsecured loan. The runaway inflation of the late ‘70s and early ‘80s led to a cost of cars that produced monthly payments on 36 month terms that people could not afford. In order to sustain sales, there was a fundamental change in auto financing. There followed 48 month, 60 month, and 72 month loans to purchase the cars. Even those terms did not keep up with the rising magnitude of the monthly payments required. There followed the shift to leasing as an alternative to buying, with accordingly lower payments. All of this suggests to me that the problem is fundamentally a lack of capacity on the part of the consumer to take on additional credit obligations. As a nation of consumers, we appear to be maxed out on credit.
In 1999 American household debt amounted to about $6 trillion. By 2006 it doubled to $12 trillion. This is not simply a function of population growth. As a percentage of disposable income, it had grown from 75% in 1985 to 150% in 2007.
This conclusion that we are maxed out would seem to be reinforced by the experience with President Bush’s tax rebates. These provided no stimulus to the economy because people used the refunds to pay debts. If the consuming public cannot take on additional debt because of an incapacity to pay the debt it already has, making more credit available is not the answer. The real problem is that consumer debt so far this decade has grown twice as fast as consumer income. The government cannot borrow its way to prosperity. Likewise the consumer can only finance so much prosperity as he can make the payments on. Again, as a nation of consumers, we are maxed out on credit.
Because the situation is indistinguishable from a homeowner using a credit card to make his mortgage payment, the credit problem solution proposed by the stimulus is nothing less than a gigantic Ponzi scheme that has already reached its point of implosion.
Likewise it is urged that something needs to be done and the usual solution is to throw massive amounts of money at the problem. This is again a smoke screen which will do us far more long term harm than we can afford. Besides borrowing, the plan is to give borrowed money to the public by way of government jobs, either directly by expansion of the civil service, or indirectly by way of government contracted work.
This will produce a fundamental change to the structure of our society. Before this crisis began, in our state of Oregon approximately 25% of the work force was employed in sectors producing commodities which upon sale make money: farming, manufacturing, and construction. There was another 25% employed in civil service: federal, state, and local. Civil servants contribute nothing to the economy and their compensation must be paid by the remainder of the work force. The remaining 50% is employed in service industries whose only real function is the transfer and redistribution of money that someone else has already made: trades, banking, retail sales, insurance, real estate. Notably, the stimulus plan contemplates extensive spending for schools (teachers and administrators are direct civil servants), for police (more direct civil servants) and for government construction (indirect civil servants). Curing the unemployed problem in the production sector by providing employment in the government sector, either directly or indirectly, will only provide more burden upon the remaining production sector who must pay the taxes to payroll government employment. Yet another Ponzi scheme that is unsustainable.
At the same time, our social justice elitists, presented with an unrestrained opportunity to implement their plans for social reform, are using the frantic hype to introduce unfunded long term social welfare. These programs will be unfunded liabilities for the federal government like Social Security and Medicare. These off the books liabilities will have to paid by future generations. It is reported that of our 305 million population, only 140 million file tax returns and, of those, roughly a third pay no taxes. If one pays no taxes, it suggests one had no income.
The present reality is that less than 1/3 of the population is paying to maintain the other 2/3.
This cannot work out. Socialism, democratic or otherwise, is the quintessential Ponzi scheme.
The bottom line on the stimulus package is that it is a bad idea. The American consumer cannot afford the additional credit required to stimulate consumption. The American taxpayer cannot afford the additional taxes required to pay the government’s credit liability. This will not save the economy. It will only hasten our bankruptcy.
© 2009 Jack Swift - All Rights Reserved
By Jack H. Swift, Esq.
February 8, 2009
NewsWithViews.com
You Can Protest the Stimulus package here.
Congress is poised once again to do what it does best. It is going to spend astronomic amounts of money it does not have. From a debt perspective, this can only make our current economic problems worse.
From our founding until 1981 our government only managed to accumulate $1 Trillion in debt. Since 1981, our modern Congress has added an additional $9.6 Trillion. Without consideration of the bailout program and this proposed stimulus plan, the government’s debt was 70% of our annual gross domestic product. The annual interest on this debt is an annual expense in excess of $400 billion. A staggering 45% of that government debt is owed to foreign nations.
If the underlying problem to our economic situation is fundamentally one of insolvency, adding additional debt service obligations can only compound the problem. We cannot borrow our way to prosperity.
Senator Shelby of the Senate Banking Committee observed that Congress can’t hope to fix our economic problem until Congress figures out what the problem is.
Initially the American public was told that the problem was one of inability of our banking systems to provide adequate credit availability to fund our commerce. Congress, against the wishes of the American public, borrowed $800 billion to give the banks and financial institutions. This did not cure the problem. It failed because a lack of credit availability wasn’t the problem. Ford and General Motors shut down their 2008 model production runs six months early not because of a lack of financing for orders for new cars. The problem was a lack of orders. This was months before there was any word of any credit crisis.
The word now is that the fundamental problem is one of lack of confidence of the consumers. They are reluctant to undertake more financial obligations in view of an uncertain economic future.
There is a lot of merit to this argument. Way back in the days of the OPEC oil embargo I was engaged in auto sales and I saw a definite correlation of sales to a lack of current bad economic news. But it misses the real point at issue in our crisis.
Prior to the downturn in our economy in the 1970s, automobile financing was generally limited to a term of 36 months. This was well justified on the basis that the depreciation of the asset being financed occurred so rapidly that financing for a longer term wound up an unsecured loan. The runaway inflation of the late ‘70s and early ‘80s led to a cost of cars that produced monthly payments on 36 month terms that people could not afford. In order to sustain sales, there was a fundamental change in auto financing. There followed 48 month, 60 month, and 72 month loans to purchase the cars. Even those terms did not keep up with the rising magnitude of the monthly payments required. There followed the shift to leasing as an alternative to buying, with accordingly lower payments. All of this suggests to me that the problem is fundamentally a lack of capacity on the part of the consumer to take on additional credit obligations. As a nation of consumers, we appear to be maxed out on credit.
In 1999 American household debt amounted to about $6 trillion. By 2006 it doubled to $12 trillion. This is not simply a function of population growth. As a percentage of disposable income, it had grown from 75% in 1985 to 150% in 2007.
This conclusion that we are maxed out would seem to be reinforced by the experience with President Bush’s tax rebates. These provided no stimulus to the economy because people used the refunds to pay debts. If the consuming public cannot take on additional debt because of an incapacity to pay the debt it already has, making more credit available is not the answer. The real problem is that consumer debt so far this decade has grown twice as fast as consumer income. The government cannot borrow its way to prosperity. Likewise the consumer can only finance so much prosperity as he can make the payments on. Again, as a nation of consumers, we are maxed out on credit.
Because the situation is indistinguishable from a homeowner using a credit card to make his mortgage payment, the credit problem solution proposed by the stimulus is nothing less than a gigantic Ponzi scheme that has already reached its point of implosion.
Likewise it is urged that something needs to be done and the usual solution is to throw massive amounts of money at the problem. This is again a smoke screen which will do us far more long term harm than we can afford. Besides borrowing, the plan is to give borrowed money to the public by way of government jobs, either directly by expansion of the civil service, or indirectly by way of government contracted work.
This will produce a fundamental change to the structure of our society. Before this crisis began, in our state of Oregon approximately 25% of the work force was employed in sectors producing commodities which upon sale make money: farming, manufacturing, and construction. There was another 25% employed in civil service: federal, state, and local. Civil servants contribute nothing to the economy and their compensation must be paid by the remainder of the work force. The remaining 50% is employed in service industries whose only real function is the transfer and redistribution of money that someone else has already made: trades, banking, retail sales, insurance, real estate. Notably, the stimulus plan contemplates extensive spending for schools (teachers and administrators are direct civil servants), for police (more direct civil servants) and for government construction (indirect civil servants). Curing the unemployed problem in the production sector by providing employment in the government sector, either directly or indirectly, will only provide more burden upon the remaining production sector who must pay the taxes to payroll government employment. Yet another Ponzi scheme that is unsustainable.
At the same time, our social justice elitists, presented with an unrestrained opportunity to implement their plans for social reform, are using the frantic hype to introduce unfunded long term social welfare. These programs will be unfunded liabilities for the federal government like Social Security and Medicare. These off the books liabilities will have to paid by future generations. It is reported that of our 305 million population, only 140 million file tax returns and, of those, roughly a third pay no taxes. If one pays no taxes, it suggests one had no income.
The present reality is that less than 1/3 of the population is paying to maintain the other 2/3.
This cannot work out. Socialism, democratic or otherwise, is the quintessential Ponzi scheme.
The bottom line on the stimulus package is that it is a bad idea. The American consumer cannot afford the additional credit required to stimulate consumption. The American taxpayer cannot afford the additional taxes required to pay the government’s credit liability. This will not save the economy. It will only hasten our bankruptcy.
© 2009 Jack Swift - All Rights Reserved
posted by shummer60 at Sunday, February 08, 2009
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