On Thursday Obama announced his administration’s “package” intended to help the job situation in the US. The package includes tax cuts, infrastructure projects and more stimulus.
I do not want to talk about politics because first of all it should not be about politics. It should be about sound economics.
One would think that the decision makers would learn out of past experience but it seems that they have forgotten the simple fact that you cannot stimulate your way out of a crisis or recession. Whether you look at the initial bailout signed during the crisis, QE1 or QE2 or the bailouts of Greece in Europe – these policies have never brought long-term sustainable recovery.
Now why is that so? First of all a good analogy is in order. Imagine you are sick and in pain. What you should normally do is stay in bed, take some medicine a just take your time to get better. This can be a lengthy process but to really get out of the woods the body needs to regenerate. Now, what if someone were to offer you drugs like cocaine or heroin? After taking them you would feel better. Actually for a short period you would feel fantastic. However, once the moment passed, you would collapse not only because of the sickness but also because of the addiction. Again, you could either choose to step back and heal – which would take even more time now – or take another dose of drugs.
This metaphor fits the economic stimulus policies used by the current leaders of the Western world. You see the fundamental economies of the Western world are not healthy. The immense amounts of sovereign debt, a labor force that cannot compete with Asia, housing bubbles and damaged currencies because of irresponsible monetary policy have deteriorated the fundamentals so much that it will take very long time before they can recover. This situation is a result of a consumption and service based economy combined with cheap credit and greed.
Stimulus cannot repair those. New money is just going to give the economy a short blip but will fade away the same way as the great feeling of using drugs. You see, if cheap money or artificial projects and tax cuts are enacted, businesses and consumers will not be motivated to live within their means. It will send out a message to everyone saying the party is not over – go spend again money you do not really have. And we all know what happens if one takes too many doses of drugs.
Thus, we are again heading towards a bigger crisis. With Obama not bringing change but more of the same again. I have expected him to be honest – to say what everyone needs to hear – that the Western world has lived beyond its means for a long time and that we need to cut back, save and start rebuilding. That it will get worse before it gets better but that we are doing it for our children and their children. But he didn’t …
So what was I wishing for? I wished that Obama would announce a change in leadership at the Treasury and the Federal Reserve. The current leadership has proven that they do not know how to get the country out of the current situation and on to a recovery path. I was hoping for a tightening of fiscal policy that would again give value to a seriously damaged dollar. A timeline on when and how the interest rates would be brought back to normal levels and how that would be handled. In terms of jobs I hoped Obama would announce a plan where he would work together with business in the US to identify the root causes why plenty of them are struggling and are unable to compete in the global market. Finally, I hoped any stimulus type policy would be payed for by cuts in spending so that it would not again add to the deficit.
The result would have been a sign of leadership from the US and Europe would have followed. Yes, the medicine would taste bad and yes it would take time before we could get out of bed and go out to have fun. It would get worse before it would get any better. But it would have put the US on a path to recovery.
So what will happen now? The US government will spend $450 billion on trying to create jobs and improve the market sentiment. And it may work for a short period of time. But it will add to the US budget deficit and will increase the issues with the fundamentals. And so the addiction will come back and Obama or whoever is President in 2012 will face the problem again – but worse.
I really do not want to sound depressive but I do feel that the US is caught in a perpetual cycle and nobody is able to break out of it. If this continues, one day it will reach overdose and that will not be pretty.
I really loved the Blackberry. When I got my first iPhone – I switched within 2 weeks to a Blackberry Bold and for a time I was happy. These days I use an iPhone 4 (check out the What I use page) and while I believe it is the best smartphone currently available I remained a fan of the Canadian fruit company.