Casey Files:
Obama Has No Clothes
David Galland
Managing Editor,
The Casey
Report
Feb 23, 2009
It would be unfair to pounce
all over Team Obama this early in their administration. After
all, while the Democrats bear a lot of responsibility
for the knee-deep toxic mess now covering the floor of the engine
room, the bulk of the responsibility has to rest on the shrugging
shoulders of Obama's immediate predecessor and those that came
before him.
Early though it may be, however,
it's not too early to come right out and say what needs to be
said: when it comes to the steps being taken to address the current
crisis, Obama has no clothes.
Both President Obama and Timothy
Geithner, the latest recipient of the Goldman Sachs Chair for
Managing the Treasury, are on record as saying that the Japanese
experiment in quantitative easing didn't work. They say much
the same about FDR's New Deal. In both instances, they correctly
point out that massive doses of government stimulus had no lasting
effect.
If the history lesson stopped
there, we could all nod our heads in agreement and go about our
business.
Alas, the lips of Mssrs. Obama
and Geithner keep moving telling us with great confidence that
the reason the fiscal exertions of Japan and FDR failed was only
because in each case government didn't act quickly enough, or
with enough monetary vigor.
Having thus explained the shortcomings
in prior adventures in stimuli, the administration promises that
"this time it will be different" and wholeheartedly
commits itself to acting decisively, quickly, and with stunning
amounts of cash. By doing so, we are told, they will shock the
economy back to life.
But this argument simply doesn't
hold water -- there is zero historical precedent for the notion
that applying blunt-force government stimulus will somehow mechanically
"shock" an economy back into productivity. A couple
of bullet points:
- When FDR came into power in
1933, unemployment in the U.S. had reached a high of about 25%.
Despite tripling federal spending on the much heralded New Deal,
the best unemployment number achieved was 14%, in 1937. By 1939,
however, unemployment was back up to 19%. Now, there is some
nuance in those numbers, because the calculations include some
number of people on the payrolls of the New Deal's many make-work
programs. Yet, given the fact that those make-work jobs would
have come to a quick end if the government had stopped its New
Deal spending, the poor results of the FDR stimulus hold up.
.
- In the Japanese crash, the
government spent hundreds of billions supporting banks and businesses,
buying U.S. Treasuries in an attempt to keep the yen cheap and
so their manufacturing sector at work. As the economic morass
dragged on, the government cut interest rates to zero, then eventually
accelerated spending in a five-year experiment in "quantitative
easing," which involved funding all manner of public works
projects and other targeted infusions of government spending
into the economy.
Using the equity market as a proxy for the broader economy, the
Nikkei fell from around 38,000 at the height of the bubble in
the late 1980s, down to around 7,000. During the five-year period
of quantitative easing, 2001 to 2006, the Nikkei rebounded by
about 100%, moving back to the 14,000 neighborhood. Importantly,
however, the minute the Japanese government stopped the spending,
the stock market came tumbling back down to around 7,500, near
where it hovers today. Note that at no point did it get anywhere
near the bubble high of over 38,000.
In sum, the evidence strongly
suggests that there is no permanent benefit to be gained from
throwing a lot of money at an economy, though there is one clear
negative: a steep ratcheting up in government debt. Of course,
because the government doesn't actually make anything, what we're
really talking about is a steep ratcheting up of your
debt... and that of your children... and their children.
So, what's going on? Don't
you think all the Obama's horses and all the Obama's men know
this?
Maybe they do.
In earlier editions of this
missive, I have commented that President Obama may be the best
politician in U.S. history. How else to explain how a virtually
unknown black man could, in just a few short years, become president.
And do so despite a foreign father and two given names eerily
reminiscent of two of the most vilified individuals in the current
American ethos? Impossible, most would have said, if asked a
few years ago. But here he is, undeniable proof of his
political skills.
Not to be cynical, but what
if, on surveying the landscape, Obama and his inner circle came
to the following conclusions about the possible paths they could
take in regard to the dismal economy:
Path One: Stand aside and let Mr. Market put
on the leather gloves, pick up the truncheon, and get to work
pounding the economic dislocations out of the economy.
Or...
Path Two: Observe that, during the period of
Japan's quantitative easing, the economy actually did pick up,
albeit on a cushion of growing government debt. Using the same
approach, one might push the worst of the economic problems past
the next presidential election. Given his political skills, that
approach syncs up nicely with what is almost certainly Obama's
most pressing personal goal: to avoid at all costs the ignominy
of being a one-term president.
Besides, Team Obama could rationalize,
even though the quantitative easing will have no lasting effect
other than sending government deficits through the roof (a fact
that Obama has been very candid about), it will at least buy
the new administration some time to come up with another plan
that might actually work.
I sincerely believe that just
this sort of calculation has been made, and not for practical
economic reasons - but almost entirely political ones. Supporting
that contention, a large part of the spending in the latest stimulus
bill is slated for 2011, the year before the next presidential
election is held. Coincidence?
Then there is the $2 billion
earmarked for ACORN in that same stimulus bill. While I tend
to dismiss the allegations about ACORN's purported voter fraud
as desperate measures on the part of the failing McCain campaign,
what we do know about ACORN is that their primary mission is
voter registration, and that they are very friendly to President
Obama.
It's all a big win-win... as
in "yes we can" win-win the next presidential election.
The way the current mess will
actually get cleaned up is through the adoption of measures that
support, or at least don't hinder, entrepreneurs running or starting
businesses and expanding into new markets. What we have instead
is yet another experiment in more government.
In this matter, at least, Obama
has no clothes.
***
David Galland is the managing
editor of The Casey
Report, the flagship publication of Casey Research, for over
28 years providing individual investors with unbiased research
and recommendations designed to help them navigate the ever-changing
tides of investment markets. Did your broker or favorite investment
commentator warn you of the current crash? Casey Research did...
"The banking system
will have trillions in mortgages, credit card balances and other
consumer debt they won't be able to collect. Millions of houses
will hit the market in distress sales. Local governments, which
are relying on inflated property tax bills to raise money to
squander, will see rising expenses as an impoverished public
demands more services - at the very time their revenues almost
cease to exist. All of this adds up to a much more serious scenario
than a stock market collapse."
(Profit from the Collapse
of Western Civilization, lead article, August 2005).
Check it out risk-free, via
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