♠ Posted by Emmanuel in Credit Crisis
at 8/17/2009 02:37:00 AM
I got the call today, I didn't wanna hear...but I knew that it would comeAnd so I find myself in familiar territory of having to comment on stimulus, particularly the non-stimulating American variety due to various press reports about it that make very little sense for reasons that will become very clear. Let us begin our journey to get it over with as soon as possible.
That four commentators on various ends of the respectability spectrum misunderstand the matter of recession spending is indicative of the fog that surrounds the stimulus debate. While I cannot claim to be the last word on the matter, rest assured that I can tell when others make basic factual errors. Let us first dispose of that poster boy for economic sensationalism, Ambrose Evans-Pritchard, recently dubbed by this blog as the world's worst financial reporter due to his proud lack of basic understanding of finance and serial tabloidal tendencies:
Crass Keynesianism has done its job. A blast of fiscal stimulus and "cash-for-clunker" schemes have lifted France and Germany from the depths of recession...The twin motors of Europe each eked out 0.3pc growth in the second quarter, much to the consternation of their own governments and the International Monetary Fund...Charles Dumas from Lombard Street Research said Germany has relied on more crass Keynesianism than it lets on. "They have had a budget stimulus, car subsidies, and they're paying people without jobs [Kurzarbeit]. This is all to the good, but it doesn't in any way create the foundations for a new growth story."
As usual, we should take whatever Evans-Pritchard says with a grain of salt. The thing is that neither France nor Germany are particularly big spenders on a metric of stimulus spending as a percentage of GDP. Portraying France (1.6%) and Germany's (1.3%) efforts as "crass Keynsianism" is, well, just crass. The contrast is sharpest, of course, with the United States' $787 billion effort (5.5% of GDP). So, for starters, we can comfortably dispose with the idea that France and Germany are big stimulus spenders.
Next up we have another dodgy character, Henry Blodget. Blodget is best remembered for his pump-and-dump antics as a Merrill Lynch tech stock analyst during the height of the Internet bubble. We know the rest of the story: he was fined heavily and barred from working in the securities industry. Like Evans-Pritchard, Blodget has found a second life as a pundit for any number of gullible news outlets. For instance, take Yahoo!
Third on our hit parade is the sort of character I tend to dislike, the USA#1-style cheerleader who willfully ignores the pathetic state of modern America. This one is by Jeffrey Garten, formerly a Clinton-era Undersecretary of Commerce and currently a Blackstone managing director. With a profile like that, you expect boosterism during a Democratic administration. The title of a recent Newsweek cover was so incredulous that I had to take a second glance: it read--I am not kidding--America Still Rules. Topping off this whopper was the article inside by Garten entitled--get this--Why America Leads the Economic Recovery: Why the United States Will Come Out of the Crisis On Top. You can laugh at this article at your leisure, but here are two choice throwaway lines:
ahead of other countries, nevermind that it's actually France, Germany, and now Japan who have actually led the way out. In the second quarter of 2009, all three have recorded positive growth figures while the Anglo-Saxons the US and UK remain in recessionary doldrums. So why isn't the US coming out if others have already begun their heavy lifting? Beats me; go ask Garten.
Finally, we have the respected if politically incorrect conservative historian Niall Ferguson pitching in on America's stimulus-driven plight:
And the kicker is that much-trumpeted Q2 GDP report which showed a "slowing down" in the rate of the incredible shrinking economy according to permabull pundits. Like many, I enjoy my newsletter subscription to John Mauldin. Another former Merrill Lynch guy, David Rosenberg, put Obamanite stimulus in proper perspective in a recent newsletter. Despite bags of money being thrown at consumers and reductions in taxes galore, the results were decidedly disheartening for USA#1-style cheerleaders:
Next up we have another dodgy character, Henry Blodget. Blodget is best remembered for his pump-and-dump antics as a Merrill Lynch tech stock analyst during the height of the Internet bubble. We know the rest of the story: he was fined heavily and barred from working in the securities industry. Like Evans-Pritchard, Blodget has found a second life as a pundit for any number of gullible news outlets. For instance, take Yahoo!
If there's one thing most American capitalists agree on it's that Europe's economy is a disaster. It never grows, it takes years to fire lazy employees, there's no entrepreneurialism and innovation, they tax they living hell out of you, etc. And yet look who's recovering first? And look who didn't even bother with a stimulus (Germany).That's great, Blodget. So Germany hasn't spent anything on stimulus, eh? Thanks for the (dis)information, but you're just as accurate now as you were in your pump-and-dump days.
Third on our hit parade is the sort of character I tend to dislike, the USA#1-style cheerleader who willfully ignores the pathetic state of modern America. This one is by Jeffrey Garten, formerly a Clinton-era Undersecretary of Commerce and currently a Blackstone managing director. With a profile like that, you expect boosterism during a Democratic administration. The title of a recent Newsweek cover was so incredulous that I had to take a second glance: it read--I am not kidding--America Still Rules. Topping off this whopper was the article inside by Garten entitled--get this--Why America Leads the Economic Recovery: Why the United States Will Come Out of the Crisis On Top. You can laugh at this article at your leisure, but here are two choice throwaway lines:
Although the upturn in the U.S. may be coming quicker than in most other countries, it is unlikely to be strong enough to be the locomotive for global recovery, as has happened in past recessions...In hindsight, Garten evidently saw stimulus-jihad as America's way out of this morass
The German chancellor is also facing an imminent election and has been too vocal in opposing the stimulus the world desperately needs, and France's president is too inconsistent and too mercurial to be effective on the international scene...
The bottom line is that America can lead the global recovery politically without having to do all the heavy lifting economically.
ahead of other countries, nevermind that it's actually France, Germany, and now Japan who have actually led the way out. In the second quarter of 2009, all three have recorded positive growth figures while the Anglo-Saxons the US and UK remain in recessionary doldrums. So why isn't the US coming out if others have already begun their heavy lifting? Beats me; go ask Garten.
Finally, we have the respected if politically incorrect conservative historian Niall Ferguson pitching in on America's stimulus-driven plight:
His stimulus bill has clearly made a significant contribution to stabilising the US economy since its passage in February...According to Moody’s, the ratings agency, the stimulus package has saved more than 500,000 jobs. Without the jump in government spending, GDP would still be in a nosedive...Actually, I am receptive to the second half of Ferguson's article when he gets to how US debt will sink it. However, his treatment of stimulus as positive defies realities even he recognizes:
Anyone expecting private consumption to bounce back is dreaming; real personal spending actually fell in June. Moreover, the property crisis is far from over. The number of prime borrowers behind on mortgage payments rose 13.8 per cent between March and June.You can add record foreclosures during the most recent month to US housing woes. There are also two prime indicators that suggest the US consumer is a carcass of its former selfishness. To negative personal spending in June you can add negative retail sales for the month of July despite expectations of a hefty rebound--what a start for those expecting a consumer-led bounce in third quarter 2009.
And the kicker is that much-trumpeted Q2 GDP report which showed a "slowing down" in the rate of the incredible shrinking economy according to permabull pundits. Like many, I enjoy my newsletter subscription to John Mauldin. Another former Merrill Lynch guy, David Rosenberg, put Obamanite stimulus in proper perspective in a recent newsletter. Despite bags of money being thrown at consumers and reductions in taxes galore, the results were decidedly disheartening for USA#1-style cheerleaders:
The details in today's report left something to be desired. Consumer spending came in at -1.2% annualized, twice the decline expected by the consensus. This occurred in the face of gargantuan fiscal stimulus and leaves wondering how this critical 70% chunk of the economy is going to perform as the cash-flow boost from Uncle Sam's generosity recedes in the second half of the year. Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!Bottom line: the US economy stinks, it isn't getting a whole lot better, and even if it does improve it's likely to have subpar, below trend growth for an extended period of time. Meanwhile, its stimulus is worse than useless in racking up future obligations at a torrid pace. My suggestion is that you set aside some time to look at actual numbers to put things together for yourselves no matter what the pundits say--me included! The above smorgasbord of faulty commentary is just the tip of the misinformation iceberg. As for me, my beliefs regarding stimulus remain the same even if it's early days with the economic results. Call them Emmanuel's Stimulus Rules:
- There is no significant correlation between the amount of fiscal stimulus and improvements in economic performance;
- Untargeted, pork-filled, throw it against the wall and see if it sticks Obamanite stimulus is least likely to obtain results;
- Given that towering indebtedness is a likely consequence of massive stimulus, adjusting spending on a limited trial-and-error basis is welcome to identify areas where improvements may obtain instead of having a master blueprint followed through and through regardless of performance.
UPDATE: Polls indicate Americans are unconvinced that stimulus has done or will do anything to improve their sad lot.
