La Riposte

Sunday, November 14, 2010

A Tale of Two Stimulus Packages

Two years ago, China introduced a 600 billion dollar stimulus package that not only prevented the nation from being sucked into the global recession, but kept several other Pacific countries including Indonesia and Australia out of the crisis by facilitating massive purchases of commodities.

But besides 22 million more domestic jobs and a stabilized regional economy, China received something more tangible for its massive government investment. In fact, it’s gotten a lot of things, including 11,000 miles of High-Speed Rail (HSR) lines and new bullet-trains to service them. That accounts for just a fraction of the approximately 40% spent on infrastructure projects, which included new roads and airports, reconstruction projects in areas struck by natural disasters, the construction of low-cost housing, and around 5 billion in new “green” technology.

At the same time, the US was also attempting to shore up its economy – but did so by using 150 billion to provide each US taxpayer with an extra $300 in pocket money, and by spending another 700 billion bailing out a handful of large investment firms, banks, and automobile manufacturers. The result? A net loss of over 3 million jobs, the continued existence of a few large firms, and no appreciable improvement or expansion in the nation’s key infrastructure.

Now, the US Federal Reserve is firing another 600 billion dollar shot from the money gun at the US economy – which begs the question, what will it do for America? Sadly, the answer is “probably not much.” Few people understand exactly what the Fed is doing – certainly most articles in the mainstream media don’t explain it well. In the simplest terms, the Federal Reserve  has 2 primary methods it can use to stimulate the economy (and it can do this without Congressional or Presidential approval). The first method is to lower interest rates, which is supposed to incentivize people and businesses to borrow money to buy products (including homes and cars) and is expected to grow the economy by raising consumption. But in this case, they’d have to lower the Federal Funds Rate (the rate banks charge each other to loan funds between each other) below zero – it’s already at the lowest rate since 1954.

Instead, the Fed is using another the second approach, which is to literally print money and use it to buy back existing government debt from banks. This will have the effect, in theory, of putting more money into the banks at a rate below zero interest – which the banks can then lend out at rates even lower than the current record-low rates. In theory, this will encourage businesses and private citizens to borrow, borrow, borrow and spend, spend, spend.

Some might shake their head and wonder if that’s not exactly what got us into this mess in the first place – US over-consumption of consumer goods. And they’d be right to wonder. They should also be wondering what will happen if canny banks choose to sit on the money, or use it as a cushion to allow themselves to write off bad debt internally, or to invest it in speculative ventures for their own benefit.

What’s very unlikely to happen is that any of this money will show up in the form of reinforced bridges, upgraded airports, a new air traffic control system, high-speed rail linking major cities, new low-cost dwellings for the underprivileged, additional money for education and health or any other significant and tangible improvements to American infrastructure and human development.

Who will benefit from this latest attempt at stimulating the US economy? The domestic winners may be the upper and middle classes, those whose credit is sufficiently good to take advantage of any decrease in interest rates to buy up income-producing assets such as rental property. But the stimulus is unlikely to produce either jobs for any class of worker, nor provide greater access to loan funds for the lower class and those who are out of work, or have other blemishes on their credit. The losers are also the public at large that might have benefited from the second order effects of infrastructure improvements, along with the unemployed who might have been hired to build and service such projects. And of course, as the extra dollars drive inflation up, everyone will suffer higher costs for goods and services. Abroad, the short-term winners may be developing economies that enjoy infusions of investor cash as those able to borrow in the US seek foreign assets with higher returns to line their pockets. The losers, of course, will be those economies that find a weakening dollar drives the cost of their products up and lowers sales.

All in all, this represents an opportunity for the lucky few, and an opportunity lost for the country as a whole.

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