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Monday, August 03, 2009

Government stimulus: take from the future and give to the present

You can’t take things from the future without putting them back eventually. The future won’t stand for it. But the feds, in their benighted confusion, fight the problem like a farmer who plows backwards to fool the crows. They think the problem is too little demand. So, they try to add demand…with tax cuts…spending programs…low rates…easy credit…cash for clunkers and other fixes. What do these policies achieve? Do they really increase demand? No, they can’t do that…that would require a richer population with more money to spend. What they try to do is to move demand forward.

The problem, of course, is that too much demand has already been moved forward. But they’re nevertheless trying to steal even more of it…taking away demand that would normally show up two, three, four…ten years from now. That car that you might buy next year, for example. With the ‘cash for clunkers’ program, you might make the purchase now instead of waiting until you actually have the money. Or, that new parking lot behind the town hall. We won’t really need it for a few years, but heck, if they’re giving away money now… Or how about that trip to Europe? With a big tax rebate check, you might decide to take it on your 20th wedding anniversary, rather than wait ’til your 25th.

Real demand increases only when real wages increase. Then, people have more purchasing power. Trying to increase demand by borrowing – or stealing – from the future is a scam at best. Even if it works now, it fails later.
-- from "Sticking With the Basics" by Bill Bonner

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