Take Away Stimulus Spending and You’ve Got an Economy Entering Depression

Hey...how 'bout this rally!

The Dow was up 120 points yesterday. Now, we're beating the bounce of 1930. The post-crash bounce in 1930 lasted fifth months. Ours began on March 9th...so it is now in its sixth month.

And like 1930, people are coming to believe that recession is almost over...and happy times are here again.

Heck, we're sure the trouble is behind us now; 53 economists said so!

According to Bloomberg:

"The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey. Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003.

"'We've averted the worst, and there are clear signs the stimulus is working,' said Kenneth Goldstein, an economist at the Conference Board in New York.

"'Cash-for-clunkers was the icing on the cake,' said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. 'It's well- timed stimulus syncing with cyclical forces leading to a ramping up of production.'"

Yes, now the economy is firing on all cylinders...or just about. Yep. No doubt about it. Still, there are some nagging doubts. The latest figures show foreclosures still increasing - up 7% in July from a year before. And house prices are still going down. And unemployment is still going up. And consumer prices are falling...indicating a Japan- like deflation. And business profits are falling. And consumers are cutting back. But except for that - housing, jobs, sales, profits and deflation - everything is working out beautifully.

Now that we mention it, all the indicators of real economic activity are down.

So, the feds aren't taking any chances. Yesterday came news that the Fed would continue buying bonds at least through October. And they are not likely to raise rates either. The banks can borrow at practically zero interest...and use the money to buy Treasury bonds. The 10-year yields about 3.7%. In effect, they're lending the money back to the people they got it from...and earning 3.7% for their trouble.

But, take away the stimulus spending...and the stimulating low interest rates...and what have you got? You've got is an economy entering a depression.

Oh, there's the rub, isn't it? If the feds hand out money so people can buy automobiles, people buy automobiles. If they don't give out the money, people don't buy automobiles. If they buy automobiles, of course, it looks like the economy is recovering. But take away the giveaways, and the recovery disappears.

Solution: keep giving away money!

Hold on...something wrong here. If you could generate economic prosperity by giving people money so they could buy things...why not give them money to buy everything? Why just autos? Why not give them money to buy financial advisory services? Ah...now we're talking!

But let's keep this serious...well, as serious as we can be when we talk about programs designed by knuckleheads.

So, the feds are encouraging people to buy autos. Set aside the fact that buying too many autos and other things is what got them into trouble...

..if giving people money so they could buy things actually made people prosperous, welfare recipients would be the richest people on the planet. Obviously, it doesn't work that way. What makes people rich is the ability to earn money...not their ability to get handouts. And remember, too, the feds don't really have any money to hand out. They can only get money by taking it from its rightful owners - either in taxation or loans. Or, they can print it up themselves. In any case, the money adds nothing real or extra to the economy. It merely distorts the economy...twists it...misleads it...and makes it a bigger mess than it was already.

Bill Bonner
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Related Articles:

• UAW Bosses and Federal Bureaucrats Announce Five Year Plan
• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End
• Obama’s New Stimulus Program
• The Many Faces of an Economic Correction
• US Economy is Some 11 Million Jobs Short of Full Employment