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Friday, July 24, 2009

The solution to too much stimulus? More stimulus!

After a half a century of stimulus – with credit, inflation and the money supply growing faster and faster – the Fed put the pedal to the metal following the nano-recession of 2001. It dropped interest rates to just 1% – well below the rate of consumer price inflation – and kept them there until an expansion had been going on for three years.

Stimulus stimulates. By 2007, the world economy was taking curves far too fast. As we guessed, the stimulus didn’t stimulate nearly as well as the meddlers had hoped. Instead of increasing real output in the US, it lured Americans to spend and speculate…and drove Chinese entrepreneurs to put up new factories in order to give them something to buy. In America, debt grew 5 times faster than GDP; for each dollar of extra income, Americans added $5.50 to their debt. In China, manufacturing capacity grew faster than ever.

Whole industrial cities, the size of New York or Chicago, were added to the map – in a matter of just a few months.

Now the world has too many factories…and too many consumers with no money to consume with.

You’ve heard us tell this tale many times. You’d probably like us to get on with it…and tell you how it turns out. Instead, we keep looking back.

“Bubbles had been localized in the past,” Marc explained. “A bubble in one area drew investment from another area. In one market, prices soared. In another they slumped. Overall, things didn’t change much.”

But a worldwide bubble in everything is something new. And it caused something else that is new – a worldwide crash. We have been ducking explosions and stepping over the debris for the last two years.

One of the biggest and most obvious consequences of this worldwide bubble is unemployment. Even Ben Bernanke says that joblessness could be a problem for years. What to do about it? More stimulus!

“The (Fed) believes that a highly accommodative stance of monetary policy will be appropriate for an extended period,” he said on Tuesday.

Will this new stimulus succeed? Will the depression end soon?

‘No’ is the right answer. Instead, it must run its course. It must eliminate plus capacity and reduce excess debt. Until that is done, the job picture will get worse, not better.
-- from "A Worldwide Bubble in Everything" by Bill Bonner

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