Guest Observer - Thursday, 9 July 2009
War on Capitalism? Taking Aaron to Task and Policy Too
From Guest Observer Steven Blitz, of Blitz Bits on Capital Markets & The Economy
Aaron Task writes for thestreet.com and has a post today in Yahoo finance declaring Government stimulus as "War on Capitalism". Normally I let this nonsense pass unnoticed but its sheer repetition has too many believing it is true. First off, Obama and Bush II were saving capitalism not declaring war on it. If they wanted to declare war they would have let WB, MER, C, and BAC follow Lehman into bankruptcy, not done anything to unfreeze capital markets, and let the consumer and business spending implosion set off a debt/deflation cycle as debt underlying income and profit expectations turns onerous and assets subsequently need to be sold to raise cash. When Roosevelt was President his response to increased carping by bankers and the like was that "they sound like a man saved from drowning and then complains that his hat wasn't saved as well". More things change ...
The kick-off for the Task post is the possibility that another round of massive stimulus is coming - and the doubt that it even works. Fact is, stimulus worked well enough in the 1930s for the economy to exit recession in March 1933 and the country to fall back into recession in May 1938 when the stimulus was reduced. Looking back, the stimulus wasn't big enough until World War II solved that problem. As for the Japan example, it doesn't hold as a comparison because they took way too long to allow failed banks to recognize losses and merge into healthier ones, the necessary step to revive lending. Remember when Japan was going to rule the world and everyone was concerned about whether they would buy U.S. debt, etc? Turns out that they might yet as this nation in a 20-year malaise more and more supplants Western banking as the source of capital to finance the Asian economy.
As for the current run of U.S. macro policy, when the economy was collapsing last Autumn it became evident that a two-prong attack was necessary. Any stimulus package designed to replace imploding consumer and business spending with government consumption would fail if the capital markets remained closed. As for the quality of the packages, monetary and fiscal alike, they are a hodge-podge. For the spending package there was no choice if there was going to be increased spending now rather than later. Without Republican support Obama needed Democrats and no self-respecting politician was going to let $787 billion get spent without a favored project tossed in. Another package? Given the back loaded spending and signs of an abating recession, I doubt it will be necessary.
The crux of the issue for Mr. Task and like minded people is the massive amount of government debt to be financed and the overwhelming amount of outstanding Treasury debt on the books. The numbers are the numbers but none of it is particularly scary -- if the spending gets the country growing in terms of real growth. It is high real growth and low inflation that reduces the debt not inflation (see the 1990s).
Herein lies the issue, how does real growth revive? A decade long run of government infrastructure spending helps but it can't be the whole thing because bridges roads and tunnels are less important to growth than the Web and cell phones - see India and China. In addition, I am not exactly sure what the sum total of the government's plan is attempting to do other than avoid economic disaster today. An obviously worthy goal but how do we recognize when enough is enough. A better balanced economy is a less leveraged economy. This means policy cannot look to get back to 4.4% unemployment, 5.5% is a more sane target.
For the U.S. to have balanced growth our major trade deficit partners (China and Japan among them, Europe not) must allow their currencies to appreciate to market levels. They have kept their currencies too cheap and manufacturing costs cheaper in order to keep their export machines growing by buying more and more dollars. How do you think they ended up with too many Treasurys and the U.S. ended up with too much capital chasing too few investment opportunities. We do not have a free trade world with free floating currencies and acting as if we do is how the Fed helped create the mess the economy is in.
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