The GDP of Stimulus

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  Now that the Great Recession has been declared dead and gone by everyone who failed to see the possibility of it happening in the first place, it is important to examine the reasons for its demise.

 The White House has been busy declaring that its Stimulus policies have created or saved 640,000 jobs. We should note that the White House originally claimed credit for 1 million jobs, and only revised them down after realizing that they are spending $234,000 for each job saved. More revisions are sure to come.

  It’s also important to note that the job number is based on mathematical calculations and is impossible to prove.

  One thing that can’t be denied is that the stimulus did have an effect on the economy. It’s this impact that needs to be examined further.

Getting Rich on Klunkers

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  The impact of the Cash4Klunkers program cannot be understated.

Historically auto sales add about 0.1% or 0.2% to the GDP. In the 3rd quarter of 2009 auto sales added 1.7% to the GDP. That is unprecedented and impossible to duplicate.

  Without the Cash4Klunkers program, the GDP number would have come in at about 2%, rather than 3.5%.

 The Cash4Klunkers program didn’t come cheap. In fact it cost $24,000 per vehicle.

 A valid way to evaluate the program economically, it says, is to look at how many people purchased cars that otherwise wouldn’t have been bought. The firm says that number is about 125,000 cars. By that measure, the government spent $24,000 to generate each sale of a new car.

 For comparison, the average price for a new vehicle in August 2009 was $26,915, minus an average cash rebate of $1,667.

  The Cash4Klunkers program ended with the 3rd Quarter and thus won’t be contributing to the 4th Quarter numbers. What’s more, the Cash4Klunkers program moved car sales forward. Thousands of autos that would normally have been purchased in the 4th Quarter got purchased on the 3rd Quarter instead. Therefore the Cash4Klunkers program will subtract from the 4th Quarter’s GDP numbers.

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Getting Rich on Bonds

  Most people didn’t notice the news from the Federal Reserve yesterday. They announced an end to the monetization of Treasury bonds.

  The Federal Reserve has created $300 Billion out of thin air over the last seven months to purchase Treasury bonds. This program is now over.

 “Some of the reality starting to hit the market: that the biggest buyer in the world will some day become the biggest seller,” said Kevin Giddis, managing director of fixed income for Morgan Keegan & Co.

  “These levels can’t sustain themselves,” he said, referring to bond yields.

 The Federal Reserve bought 50% of all new Treasury bonds issued in the 2nd Quarter.

 The monetization of these Treasuries has helped keep interest rates low, thus allowing the federal government to borrow at artificially low rates. The cost of this program has been a falling dollar, a cost paid by all the dollar savers of the world.

  It has also given the housing sector a temporary and artificial boost. This program won’t be there for most of the 4th Quarter.

  The Federal Reserve has also been active in buying mortgage-backed securities from Fannie Mae and Freddie Mac in order to prop up the market. The massive $1.45 Trillion program is supposed to finish by the end of the year.

 (Bloomberg) — The Federal Reserve said it will slow its purchases of mortgage-backed securities and housing- agency bonds while noting that the U.S. economy has strengthened.



 The Fed’s purchases “have been essential,” Julia Coronado, senior U.S. economist at BNP Paribas SA in New York, and a former member of the Fed Board forecasting staff, said before the announcement. “Without that liquidity, there would be a much worse outcome in the housing market.”

Like the Treasury bond program, the Fed has been the largest buyer of agency bonds, by far.

  The Fed has already used most of the money allocated to this program. While the program isn’t over, it will be winding down.

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Getting Rich on Houses

Judging from the latest developments, it appears that the Obama Administration is about to OK an extension and expansion the first-time homebuyers tax credit.

 When it comes to assessing the many government programs designed to alleviate the housing crisis, you have to put it into perspective.

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 The first-time homebuyers tax credit has many things in common with the Cash4Klunkers program. For instance, it steals future home purchases from the future.

 “The buyers I’m working with were looking at apartments and debating whether to buy,” said Adina Greenberg, a real estate agent at The Corcoran Group, the largest residential real estate firm in New York City. “Knowing the first-time home buyer tax credit was ending, they decided: ‘Let’s do it now.'”

 Another thing it has in common is that it is extremely expensive for what it tries to do.

 “In about four out of five cases, the tax credit went to people who would have bought a home anyway, so that means the real cost of getting that one extra buyer into the market is five times $8,000 – about $40,000,” said Andrew Jakabovics, associate director for housing and economics at the Center for American Progress, a Washington, D.C.-based think tank.

 And like the Cash4Klunkers program, it has been plagued with fraud.

 Treasury Inspector General for Tax Administration J. Russell George told a House panel that more than 19,000 people filed 2008 tax returns or amended returns claiming the credit for homes they had not yet purchased. Those claims amounted to $139 million and it was not clear that the IRS planned to go back to verify that those purchases actually took place, he said.

   George said his office had identified another $500 million in claims, by some 74,000 taxpayers, where there were indications of prior home ownership.

 Like the taxpayer bailout of Wall Street last year, Congress threw taxpayer money at a problem without putting even a modest amount of accounting and anti-fraud checks on the program.

 Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old.



Mr. George said his staff has found at least 53 cases of IRS employees filing “illegal or inappropriate” claims for the credit. “In all honesty this is an interim report. I expect that the number would be much larger than that number,” he said.

 This tax credit’s cost is running about $1 Billion a month.

  One can only wonder how much fraud we’ll see as the program is extended and expanded. We also must wonder how much good would have been done if the money had instead been directed to keeping people from losing their homes in the first place.

  Finally, the program’s extension will have diminishing effects in the future. The number of people who rushed out to purchase homes to take advantage of the tax credit before the deadline will dwindle, and now people know that there is no longer a rush.

Getting Rich on War

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  Many people seem to have forgotten that we are currently engaged in two expensive wars. Wars are the traditional way for governments to stimulate the economy (and silence dissent).

  America of today is no exception.

So What?

 To summarize this, we would have had no economic growth in the 3rd Quarter if it wasn’t for federal government stimulus spending.

 If not for all the government incursion into the economy in Q3, real GDP basically would have stagnated.

  Some may think that it doesn’t matter how the economy grows as long as it grows. Those people don’t understand how things work in the real world.

 Whether the recovery becomes self-sustaining or recedes back into recession depends first on how businesses respond to recent improvements in sales and profitability. As the benefit of the stimulus fades, businesses must fill the void by hiring and investing more actively. To date, there is not much evidence that they are doing this. At most, firms are curtailing layoffs and no longer cutting back on orders for equipment and software.

  … Unless hiring revives, job growth will not resume and unemployment will continue to rise, depressing wages and ultimately short-circuiting consumer spending and the recovery itself.

  It is possible that firms will resume hiring soon. There is historically a lag between a pickup in production and increased hiring. In the past, however, during the gap between increased production and increased full-time hiring, businesses boosted working hours and brought on more temporary employees. None of this has happened so far; hours worked remain stuck at a record low, and temporary jobs continue to decline.

 … Businesses may also wonder if demand for their products will soon fade, given that the recent improvement is supported by the monetary and fiscal stimulus and an inventory swing, all of which are temporary.

 This stimulus spending isn’t free money. It comes at a cost.

  I’m not just talking about the burden on future taxpayers yet unborn, although that is the most obvious, and immoral, cost. There are also more immediate costs.

 Because of the housing and auto subsidies, the personal savings rate plunged to 3.3% in Q3 from 4.9% in Q2 – in the past quarter-century, there have been only four other times that the savings rate went down so much in one quarter. If not for that plunge in savings, real GDP actually would have contracted fractionally last quarter. The entire GDP growth was funded by a rundown in the savings rate that occurs less than 5% of the time.

 You have to wonder about the wisdom of encouraging people with no savings to borrow more money at a time when there are no jobs. That’s like encouraging a habitual gambler to bet his mortgage at blackjack – what if the bet fails?

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 The question has to be asked, if companies, both non-financial and financial, are big believers in this new post-recession V-shaped recovery that seems to have the hedge funds and most strategists excited, why are companies still cutting back in capital expenditures and inventories and why are banks still cutting back on lending at an unprecedented 15% annual rate?

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The big money, the smart money, isn’t investing on the 3rd Quarter GDP numbers. You should be skeptical too.

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8 comments

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    • Wom Bat on October 31, 2009 at 1:24 am

    A. Us, for believing anything The Politicians say;

    or,

    B. The Politicians, for thinking we believe anything they say;

    or,

    C. The White House, for crowing about Q3’s GDP number and setting themselves up to start election year 2010 explaining where “the recovery” went.

  1. this deserves a pony……

    thanks……

    the pillaging continues…….

  2. It seems to me to be based upon a fundamental misconception of what money is.  In short, America’s debt is not going to burden future generations, because money is not “real” in the same way a rock is real.  Money is not a material thing.  Sure, coins can symbolize money — but so can pixels on a screen, as anyone who has done online banking can tell you.  Money, instead, is a relationship, like friendship — if you and I are no longer friends, something has indeed happened, but it’s not magic, as if the disappearance of a friendship were like the disappearance of a rock.

    Money, to be brief, is a claim upon wage labor-power.  Money would not have any value if people were not willing to work for it.  Gjohnsit has an amusing comment over at Orange which illustrates this:

    What creates wealth? (1+ / 0-)

    Recommended by:

       Cassiodorus

    Is it the amount of paper dollars in your pocket? If so then Zimbabwe is the richest nation on Earth.

    How did America get wealthy in the first place? We did it by making things.

    Zimbabwe’s money doesn’t net it any wealth because the Zimbabwean currency will not fetch labor-power sufficient to guarantee very much value.

    The US dollar, on the other hand, has been able to coast on the strength of its being the world’s “reserve currency,” such that the US has been able to borrow and spend trillions of dollars without really devaluing the dollar or bringing about massive inflation.  This is what dollar hegemony is about — foreign banks have so far guaranteed the value of the dollar by keeping their dollars out of circulation, thus allowing the US to print new dollars, which dollars then claim foreign products (as manufactures of foreign labor-power).

    Moreover, before dollar hegemony (according to Michael Hudson, whose history Super Imperialism should be required reading), much of US prosperity before the collapse of the dollar-gold standard in 1968 (yes, before Nixon’s official decree of 1971) was due to the fact that the US confiscated the Nazis’ gold after World War II and used it (as “money”) to claim a good amount of foreign labor-power through the dollar-gold standard.

    Thus we can definitely agree with gjohnsit that prosperity is earned by making things, but observe as well that money can lead to prosperity when others can be fooled into thinking that one’s printed money is “valuable” and thus working for.

    Let’s get back to my original point, with this information in hand.  Nobody, no “future generation,” is going to have to pay back the US national debt, now at $11.8 trillion.  Why?  Because the US can just keep printing money, endlessly, to cover this debt.  

    Will this process eventually render the US dollar worthless, as more dollars lay claim to a steadily shrinking pool of labor?  You betcha.  But it’s the faltering of the dollar as such as well as the lopsided distribution of wealth, more than anything else, which gjohnsit’s statistics reveal.  Global labor’s faith in the dollar is shrinking.  Handicapping the process of recovery, moreover, is the fact that the banks and the super-rich have a sort of vacuum which sucks out the dollars of the everyday economy — thus gjohnsit’s observation that “they are spending $234,000 for each job saved” coincides with a real economy in which the working class is broke.

    Dollar hegemony is becoming pricier, as more money must be printed to claim less labor-power.  This is the true measure of the collapse of the American economy, not the debt, and not the deficit.  Money is a relationship — a relationship between the hucksters who print the stuff and the fools who believe in its value.  As the relationship sours, so too will the value of money.  I expect the US to default on its debts eventually.  The anticipation of this will cause a dollar panic, as big investors rush to dump their dollars.  The folks who brought you NAFTA will probably unroll America’s new currency, the “Amero,” at that time.

    The utopian solution to all of this is contained in kernel form in the idea of “social credit,” a fantasy of the Fabian socialists of the early 20th century.  In this utopian solution, money is backed by the political power of the same working class which produces the products which it buys, under a socialist system.  And by a socialist system, here, the Fabians meant a real socialist system in which the working class ruled directly, not a “socialist” system in which the working class was ruled by its supposed representative, the “Communist Party.”

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