THE ILLUSION OF A STIMULUS
Alvaro Vargas Llosa
September 14, 2010
WASHINGTON—Faced with voter anger at the failure of monetary and fiscal stimulus to stimulate, the Obama administration and the Federal Reserve are doubling down. The government is launching another spending spree with an initial outlay of $50 billion geared toward infrastructure projects, while Fed Chairman Ben Bernanke recently suggested that he is contemplating new forms of money printing—so-called quantitative easing.
Stimulus policies started during George W. Bush’s final year in office and have continued, with vehemence, under Obama—to no avail. The response to this failure betrays a mind-boggling inability to learn the lesson. If almost $1 trillion of fiscal spending and a tripling of the Fed’s balance sheet have not done the trick, leaders should realize by now that the process of economic healing—paying down debts, liquidating redundant assets, saving and, eventually, investing and consuming again—cannot be altered by political diktat. Since government stimulus detracts energy from the economy it is trying to reignite, and since the Fed’s “easy money” is not being channeled by economic players toward productive purposes, it should be obvious that current policies are futile.
Actually, stimulus is worse than futile—it compounds the problem. The Austrian school of economics, whose icons include the late Nobel laureate Friedrich von Hayek, has long maintained that the boom-bust cycle is provoked by government-engineered credit expansions and the inevitable corrections. Responding to a recession with another artificial credit expansion postpones the recovery and engenders, well, more boom and bust.
The history of U.S. recessions confirms this. The dot.com bubble that burst in 1999 was followed by new monetary stimulus almost immediately. It did not alter the traumatic recovery process—which is why 40 percent of the largest bankruptcy filings between 1980 and the middle of this decade occurred after the beginning of 2001. The stimulus eventually inflated another bubble. As Joseph Calandro shows in his book “Applied Value Investing,” the housing market began to take off in the second half of 2001, pushed by “easy money” policies that proved unable to reignite the productive economy. The response to the continuing recession was even more stimulus. The housing market eventually went wild. And here we are.
We don’t know what bubble current stimulus policies are inflating. It could be commodities, which are showing signs of real excitement. But we do know that the fundamental problems that need sorting out will be compounded. The unprecedented amounts of money that have been thrown at the economy prompt the question: How on earth will the authorities pull it back when they decide that enough is enough?
Meanwhile, deficits and debt are leading the government at all levels—federal, state and municipal—to something that resembles bankruptcy even if, as the saying goes, governments never go bankrupt. In a letter to the shareholders of the FPA Crescent Fund that he manages, which was published in the recent issue of the Outstanding Investor Digest, Steven Romick rightly points out that in the next two years, 48 percent of the U.S. debt outstanding is going to mature—$3.7 trillion that will need to be rolled over. If the $3 trillion-plus of deficit funding is added, then about $7 trillion will have to be provided by someone fairly soon. Will it be the foreigners who already own half of the U.S. debt? At what point do they realize that the U.S. government can actually go broke?
At the state and municipal level, things are not much better. Forty-eight states have budget shortfalls this year. The finances of some, particularly California, look like Third World republics.
The United States, we keep hearing, has always come out of crises with renewed strength. And it is true. The country’s reserve of entrepreneurship and penchant for technological innovation have somehow managed to confound the skeptics who point at the unwieldy growth of government and the grave deterioration of its finances as a sign of irreversible decline. It is also true, as is often stated, that the United States cannot be compared with historical cases such as that of the Roman Empire, whose fall was possible in large part because its might did not rest on a market economy worthy of that name.
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But overexertion has brought capitalist empires down too—including Britain in the 20th century. At what point does the divorce from reality on the part of its leaders fatally impair the United States’ ability to reinvent itself?
© 2010 - Alvaro Vargas Llosa - All Rights Reserved