“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Thursday, August 19, 2010

Smoke and Mirrors in the Triage Room

Why stimulus isn't working
Consumers, businesses lack confidence to take advantage of cheap interest rates

August 12, 2010

'You can lead a horse to water, but you can't make him drink."

How true that old saying is. And here's another along those lines:

You can stuff the banks with money, but you can't make them lend. . . . And you can lower interest rates to zero, but you can't give people and businesses the confidence to borrow.

The Dow's 265 point drop Wednesday shows that the market has it figured out -- even if the Fed and Congress don't.

All the stimulus Congress can create -- including Wednesday's promise to send an additional $3 billion of TARP funds to struggling homeowners -- won't get consumers past the fear zone. In fact, it will just prolong the housing crisis as this failed program already has done. And it will further destroy the confidence of buyers and builders.

All the money the Fed can create won't get business going again without the critical ingredient called confidence. And confidence is just what the Fed undermined with its latest promise to keep creating new credit in the banking system and keep interest rates near zero -- all in an attempt to "stimulate" the economy.

The uncertainty factor

There's actually plenty of money around -- trillions of dollars held by banks in the form of Treasury securities, plus nearly $2 trillion in cash on the balance sheets of businesses.

But there's so much uncertainty about future growth that banks don't want to take the risk of lending to businesses. They know they can pay savers close to zero percent interest and then redeposit the cash in risk-free 10-year Treasuries earning 2.5 percent.

And there's so much uncertainty about consumer demand that businesses don't want to invest their cash in new plants or stores or products -- or even in new employees. The fact that health care and financial services reform bills are layering new and uncertain costs on business is just one more reason for companies that have cash to hoard it.

And there's so much uncertainty about the future that even potential homebuyers who have good credit, and could make a down payment on a new or existing home, are scared to do so because they don't know if they'll have jobs in the future. And they figure real estate prices will go lower, or stay low longer.

So the economy is grinding to a halt -- or at least to very slow growth.
Low rates: solution or problem?

But does the Fed have the right remedy -- or is it just making things worse?

Consider this possibility: Low interest rates may actually be slowing the economy down!

Seniors who have lived on the interest they earn on their savings have had to cut back their lifestyles -- cutting into consumer spending.

Workers trying to save for retirement realize they have to spend less and save more, slowing the economy.

Pension funds must project lower returns, so the trustees of state and business pension funds have to contribute more -- diverting resources from economic growth and expansion.

The only winner

About the only winner in this "game" is the U.S. Treasury. It gets to borrow money to fund its deficits at the lowest rates in history. With two-year Treasuries yielding only about half of 1 percent, and 10-year Treasuries yielding 2.75 percent, the government saves a fortune on interest -- for now.

In fact, if rates were only at the "normal" low levels of three years ago, according to economist Brian Wesbury, the Fed would have to spend an additional $230 billion this year to borrow -- adding to the deficit.

While these low rates aren't sparking consumer or business borrowing, they are serving as an incentive for the government to keep spending and borrowing.

Consumers and businesses have learned the lessons of frugality in uncertain times all too well. What a shame the government hasn't begun to learn that lesson. We'll all pay for its mistakes. And that's The Savage Truth.

© Copyright 2010 Sun-Times Media, LLC

The world got drunk and wreckless.  Then came the trainwreck.  We're now in triage.  First order of priority are the governments, then the banks and banking systems and last the consumers and the unwashed masses.

They're  still working on the banks.  This may take a while.


  1. I'm afraid a bunch of the "unwashed masses" are going to "bleed out."

    The metaphor that always occurs to me is when the fishing boat Captain, played by George Clooney, in "The Perfect Storm" says, "It's not going to let us out."

    I'm afraid that everytime we look like we're getting out Gasoline is going to rise, and knock us right back down.

    I know that's pretty simplistic, but the effects of $4.00 gasoline are pretty simple.

  2. 4 dollar gas is a bargain compared to Obamacare, Rufus!

    ...not to mention 4,000 more pages (still counting) of taxes and regulations from our Socialist Leaders.

  3. Investigate This, Nancy!

    "We Remember"

    Keep America Safe

    Most powerful and effective response to this lunacy.

  4. debt train about to collide with federal obligations

    At least once a day someone on CNBC talks about the $1.5 trillion in corporate cash on the sidelines and how healthy business-sector balance sheets are.

    That’s pure baloney. If you peruse the flow of funds, and you’ll see that corporate-sector cash assets have increased by $279 billion since the December 2007 peak, and now total $1.72 trillion. According to the same data, non-financial, corporate-sector debt has increased by $480 billion and now stands at $7.2 trillion. Corporate debt net of cash has actually increased by $200 billion during the Great Recession.

    Stated differently, corporate debt net of cash was $5.3 trillion or 36.7% of GDP at December 2007 and is now $5.5 trillion or 37.6% of GDP. There’s been no de-leveraging in the business sector either — especially when its noted that tangible assets have also declined by 20% on a market basis and are flat on a book basis during the same period

  5. There will be no U.S. economic recovery in the second half of 2010...

    – 13 charts showing weak housing trends, option ARM data, dramatic employment changes, and mortgage equity withdrawals.

  6. Jeezus:
    Stockman was a founding partner at The Blackstone Group!

  7. "Here's a dramatic way to look at it:
    Nominal GDP is only $100 billion higher than it was back in the third quarter of 2008. That means it has been growing at only $4 billion per month, while new federal debt has been accumulating at around $100 billion per month.

    Yes, this period represents the worst of the so-called Great Recession, but never in history has the federal debt grown at a rate of 25 times GDP for two years running!

    See See "The Road to Recovery: Are We There Yet?"

    The version of Adobe Flash Player required to view this interactive has not been found.
    To enjoy our complete interactive experience, please download a free copy of the latest version of Adobe Flash Player here.

    5 Mistakes Investors MakeUnrealistic expectations and not seeing the big picture are just a few of the mistakes investors are making in this market, says Jonathan Satovsky, CEO of Satovsky Asset Management. Dow Jones Newswires' Veronica Dagher reports.
    This time is markedly different in terms of the business-cycle impact on the budget. During the past three quarters of "recovery" -- with real growth of 5.0%, 3.7%, and 2.4%, respectively -- nominal GDP growth has averaged only about 4%. This is steeply below the figure for past cycles when we had 7-10% nominal GDP growth due to higher real growth and much higher inflation.

    Consequently, nominal GDP -- the true driver of federal revenue since they tax our "money" income, not the statistical "real" income confected by the Bureau of Economic Analysis and the Commerce Department -- has only grown at $50 billion per month during the last three quarters. In other words, the federal debt still has grown at two times the rate of GDP during what looks to be the strongest phase of the recovery."

  8. Never before, doug, has the Federal Government fought TWO Wars, over a decade in duration and not raised taxes to cover the costs.

    That is where the financial meltdown came from, those unaccounted for Federal expenditures and oil costs exploding in 2007&08.

    Now we have to fix the damage done by the Republicans spending like drunken sailors, with the Democrats believing in a hair of the dog remedy.

    Have another round!

    Simple stuff to understand, really.

  9. That is the pot is callin' the kettle black, referring of course to GW Bush and his remarks about Mr Obama's religion and any resemblance to boob.

  10. "That is where the financial meltdown came from, those unaccounted for Federal expenditures and oil costs exploding in 2007&08."

    ...the Whirreled according to 'Rat.

    In fact, the spending on Wars a tiny fraction of all the fraudulent debt-based "wealth" now (still) being liquidated.

  11. The Human toll of endless wars:

    Beyond comprehension.

  12. Doug: In fact, the spending on Wars a tiny fraction of all the fraudulent debt-based "wealth" now (still) being liquidated.

    I wondered where the party went, the money that was in the dot-com bubble, then moved to the US housing bubble. Tall money doesn't want to sit in mattresses. There was speculation that there would be a green energy bubble. But now I know, it's in the Chinese housing bubble. And when that pops there's nowhere to land.

  13. The costs of the Long War, about the same as ObamaCare is projected to be.

    The financing of the War you tell US is inconsequential, the other Health Care of Americans will be cause of future financial ruin.

    Same amounts of money.

    There you go, doug-o.

  14. I cannot believe that the borrowed costs of the war could possibly have less impact on today's economy than the future costs of Government programs.

    One has impact on the streets, the other on the blogs.

    Take it to the streets.

    What you are seeing, in today's financial markets, a direct result of the borrowed $Trillion USD for the "Long War" and our alliance with the Semitic Saudis.

  15. 1 Trillion:

    Truly petty cash in Obama's Amerika.

  16. All directly attributable to the Republican scum that ruled Washington for 8 years.

    The time frame when the disastrous policies were formulated and empowered.

  17. ...but Obama is "merely" exacerbating the problem, ala FDR.

    ...the problem the origin of which was massive fraudulent debt games.

  18. Tea Party candidates are like HE laundry detergents:

    ...closer to scum free.

  19. 'Rat busily fighting the last war, distracting himself from the present one, which is an order of magnitude larger, measured in terms of dollar expenditures mandated by our Democrat Rulers.

  20. Hey hey!
    Ho ho!
    GWB Scum has got to go!

  21. No, doug, I am fighting the same war, the one against the Federals, not the last one.

    But that fight is over seas, not domestic.

    My fight is against our global military footprint, not providing non-emergency Doctor visits to the disadvantaged here in the United States.

    I side with George Washington, in that regard. Believing we should avoid foreign entanglements.

  22. Geez four planes taken down, three thousand dead, serenaded on the way to oblivion with the dulcet sounds of "Allah Akbar"

    What is there to worry about?

    You don't have to be prejudiced against Islam to believe, as many Americans do, that the area around Ground Zero is a sacred place. But sadly, in an election season, such sentiments have been stoked into a political issue. As the debate has grown more heated, Park51, as the proposed Muslim cultural center and mosque two blocks from Ground Zero is called, has become a litmus test for everything from private-property rights to religious tolerance. But it is plain that many of Park51's opponents are motivated by deep-seated Islamophobia.

    Read more: more if you can stand it.

  23. Not Islam, Deuce.

    That is like being afraid of the dark.

    The loop you are throwing is way to wide.