Why stimulus is nonsense

At least in the West, government is a human construct that is supposed to be by the people for the people.

Government is not a for profit entity. Government is supposed to collect money from society and allocate these sums to facilitate the socio economic development of its members.

If a government spends in excess of what it collects in taxes, it must make up the shortfall with debt. Taking on debt, means that government must also pay interest. In order to pay interest, government must collect more taxes (inheritance tax, stamp duties, VAT, income tax…).

As I explain here, society needs a monetary system. Short of going back to barter, there are only two choices: a monetary system based on some sort of value that is directly related to the economy or a monetary system that is based on nothing other than political will.

In the modern era since the turn of the 20th century, Western governments have gradually and arbitrarily moved towards the political monetary system known as “fiat”. The USA went on a fiat monetary system in 1913, Europe in 1970 and then all other countries in the world followed suit. Today, all countries in the world are on a US Dollar based fiat monetary system. Note that fiat monetary systems have been tried in the past and all, inevitably, collapsed in a final glorious conflagration of debt (i.e. the French Assignats, the American Continentals, the Argentine Peso…)

Thus, today all world currencies are interconnected which means that what happens in the USA and what the USA does domestically or overseas affects us all.

So then, why is stimulus nonsense?

Stimulus is nonsense because in order for the government to spend that money, the sums must first be extracted from the economy; or the sums must be borrowed first and then extracted from the economy; … which means that however you slice it the sums must be extracted from the economy sooner or later.

In the particular case of the cash-for-clunkers stunt, pundits and officials are all in a tizzy as to the purported “success” of the scheme. So much so that they now wish to double the effort with another Billion Dollars. This of course begs the question: why not extend the scheme to clothes, windows, bicycles, TVs or, for that matter and since it is the largest national employer, the hotel and restaurant industry or any other industry you care to think of. If cash for clunkers is so effective at securing economic growth, then lets give money to every single man, woman and child to buy what they please. Come to that, why limit it to 2Billion Dollars? Heck, let’s make it 15Billion; no, wait! Let’s make it 50Billions so everyone can become at least a millionaire; that should get things going nicely me thinks.

Advocates of stimulus (mostly Keynesians) maintain that the advantage of government stimulus lies in that lag of time found in borrowing-first-paying-later scam.

And they would be right… at least for a limited time… and at an earlier stage of the inflationary cycle… because that is a scam that you can only run so long. Essentially, you can run the stimulus scam only for as long as underlying economic activity is sufficient to cover debt service. However, in 40 years of skyrocketing debt accumulation and cratering velocity of money, GDP expansion has been on life support since at least 2000. Essentially, as is typical in fiat monetary systems, once past the half way point in the inflationary dynamic, the structure of “value” is compromised as it becomes ever more dependent on currency depreciation and increasing debt rather than real demand. So, cash for clunkers, is nothing but more currency depreciation pulling even more demand forward in time.

However, in October 2008, after a steady 30 year decline, the money multiplier finally fell below 1… meaning that money and credit creation were no longer having any effect on economic expansion. This means that unless money starts circulating again, then GDP must adjust downward accordingly. Now, considering the charts I posted here and in many other essays, I’d say GDP has to adjust downwards by a good chunk for a few years to come… quite a few years to come.

The moment economic activity generates less revenue than required to cover debt service, more stimulus brings about the implosion of the economy, thus the implosion of the tax base; thus the implosion of the monetary system; thus the implosion of government.

But, as self proclaimed holders of the moral high ground, I really don’t see any Western government admitting to being bankrupt nor, indeed, admitting to fraud… because that’s what a fiat monetary system becomes when coupled with a “democracy”.

So, if the West cannot admit bankruptcy and yet there is no money to maintain social services such as mail delivery, road maintenance, driver license renewal, unemployment benefits… traffic management…. teachers’ salaries……  medical staff salaries……. food stamps………. pensions……………. debt service……………………….

Then what?

War by 2013/2015… that’s what…

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3 Responses to “Why stimulus is nonsense”

  1. Why stimulus is nonsense II « Guido’s temple of the absurd Says:

    […] stimulus is nonsense II By guidoamm As I explain here, stimulus money is taxpayer’s money; i.e. money that should be spent on road or electric grid […]

  2. Deflation at work « Guido’s temple of the absurd Says:

    […] at work By guidoamm As I point out here and in many other essays before it, once deflation sets in, government revenue collapses. The […]

  3. guidoamm Says:

    No sooner have I finished typing this essay and this comes along…

    http://blogs.abcnews.com/george/2009/08/geithner-wont-rule-out-new-taxes-for-middle-class.html

    Now. That’s a shocker!

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