On paper, recent legislation for government stimulus and bailout programs imply massive expenditures. But in practice, the actual flow of funds from Washington is often puny in comparison to the powerful events unfolding in the real economy. Specifically,
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In the past two months, the Hope for Homeowners program has offered loan modifications to 55,000 Americans. However, in March and April, lenders foreclosed on more than 683,000 homes. Thus, for each homeowner getting refinancing offers under the government’s program, more than 12 are losing their homes in foreclosure.
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Economic stimulus funds reaching the economy so far are estimated to be in the neighborhood of $40-$50 billion. However, the jobs and production cutbacks implied by the failure of just two companies — Chrysler and General Motors — could be in the hundreds of billions, erasing the impact of the stimulus.
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The overwhelming bulk of the government funds injected into the economy so far have been poured into the banking industry and credit markets — close to $600 billion under TARP and more than $1.1 trillion by the Federal Reserve. However, consumer credit has continued to contract sharply:
In the third quarter of 2007, banks made $44 billion in net new loans on credit cards, autos, and other consumer credit (excluding mortgages). Then, just 12 months later, in the third quarter of 2008, that giant credit machine collapsed to a meager $8.7 billion, a decline of 80 percent! But the collapse didn’t end there. In last year’s fourth quarter, not only did new credit disappear, but lenders actually pulled out of the consumer credit market to the tune of $19.5 billion. And they did it AGAIN in the first quarter of this year, pulling out another $12.2 billion. It is the biggest collapse in consumer credit ever recorded.
See also http://blogs.moneyandmarkets.com/martin-weiss/five-economic-storms-raging-now/
In sum, it’s always possible for policymakers and politicians to step up to the podium, promise new programs and even pass laws that commit the government to massive expenditures or liabilities. But when it comes time to cut the actual checks, government bureaucracies often run into a series of problems: It’s expensive to raise the funds; it’s hard to spend them; and the trickle of funds that do make it to the end consumer are overwhelmed by the flood of events beyond anyone’s control. That’s what’s happening today and is likely to continue in the months ahead.
{ 6 comments… read them below or add one }
hi martin and team.im moving my money into gold.medicine.and natural power resources.
The government (i.e., a coterie of politicians and bureaucrats), being a non-productive body, has no income of its own and whatever it spends has to come out of the public’s pocket, one way or another.
When the dollar used to be real money and represented a real asset, the only way the government could spend was by direct taxation and that imposed a fiscal discipline on it. When Nixon completed what FDR had started by abandoning the gold standard altogether, it removed that discipline and allowed the government to pay its bills by counterfeiting money (officially known by the high-sounding name of monetizing the debt). This results in monetary inflation which is followed by price inflation which is an indirect tax and for which the public is forced to pay through higher prices.
The bottom line is that government cannot create wealth but can only redistribute it. Therefore this so-called economic stimulation should more aptly be called economic simulation (i.e., smoke and mirrors) because it takes money out of the public’s right pocket and then puts it back into its left pocket and expects miracles to happen.
FWIW.
What is the word now? Will this be the begining of a severe delationary period? What will this do to gold stocks and bullion?
Bryan
to bryan bullion would be your safest bet. gold stocks carries (in my opinion) a default risk, where as with owining your bullion out right there is no risk, but you do have to take phyisical delivery of your bullion. onother benifit of keeping your bullion yourself is no taxes, as long as you don’t convert your bullion into cash or other investment that could trigger a taxable event. i would look at silver bullion also, but be careful becaus there is about 2—2 1/2 month lag time in delivery from the time you pay for it. also make sure you buy from a company that will give you a garrontee to fully refind your money if they can not deliver your bullion to in the specified time frame or pay you the spot price if it is higher per ounce than what you paid them .
Hi Dr. Martin. Thanks for the good insight. With massive consumer and government debt (trillions in upcoming medicare costs), the dollar is set to fall as much as 50% in the next decade due to risk of default and quantitive easing. The 2nd biggest trading partner (China) is already signing up deals to bypass $$’ in the transactions. In a recent example, Brazil and China announced that they would trade in their currencies. China is using its USD reserves to invest in oil and commodities all over the world before the USD loses its reserve status.
With physical gold in short supply, what is the best place for savers to put their money to protect it from dollar depreciation and treasury default risk in the future (which the government will prevent with quantitive easing)?
Dr. Martin, what happened to the Weimar Republic stock market during the hyperinflation period? Did “quantitative easing” produce a bull market?