Pharaoh's Stimulus

Government stimulus is phoney stimulus...

WE WERE on the television, writes Bill Bonner at the Daily Reckoning.

CNBC invited us to the Paris studio. We sat in the room alone, with a television screen in front of us and a microphone in our ear. We wondered what they wanted to ask us.

When the question came, it puzzled us. We were not prepared for so many muddled assumptions in a single interrogatory.

'Isn't the world economy extremely fragile, right now?' the interviewer led us along. 'And don't central banks have to deal with the problem before them, right now, and then, after the economy is more stable, they can turn their attentions to the more fundamental issues?'

The question assumes that 1) the world economy is supposed to be doing something it is not...and 2) that the central banks can make it do what they want...and 3) then, they'll be able to do something else with it (addressing fundamental problems).

Trouble is, each assumption is wrong...delusional...or pure fantasy.

How do central banks know what the economy should be doing? Of course, they don't. They only know what they want it to do. In the present case, they want faster rates of growth. But how can they get faster rates of growth? The question presumes that they can use "stimulus" to get it to speed up.

What, exactly, is this stimulus?

We reminded our interviewers that the original insight for economic stimulus measures came from the Bible. Pharaoh had a dream. Seven fat cows were devoured by seven lean cows. Joseph advised him to put into place a counter-cyclical economic policy. Pharaoh would save grain during the fat years... and give it out during the lean ones. This turned out to be a successful policy.

But central banks and central governments never save any grain. Fat years... lean years – they spend, spend, spend. When the lean years come they go to the granary. There's nothing there. They have nothing to stimulate with.

So what "stimulus" were our interviewers talking about? Credit! And printing press money!

It is as if Pharaoh had not set aside grain. Instead, in the lean years, he borrowed the farmers' seed corn. This would have given a little stimulus to the people...but then, come spring, they would have had no grain to plant...and nothing to harvest.

Similarly, the feds borrow money... taking it from private investors and thereby depriving the economy of the savings it needs to create jobs and factories. Or, going even further, it simply prints up extra money.

Imagine Pharaoh doing the same thing – putting sawdust in the granaries and pretending it was wheat! Thanks a lot!

'Well, we're certainly getting into the Christian allusions,' said one interviewer. We thought we detected a snide tone. As if there is nothing in the Bible worth learning... nothing that modern, enlightened economists don't already know.

'They're not Christian allusions at all,' we thought to ourselves. 'They're Jewish allusions. Christ wasn't even born until hundreds of years later.'

But we held our tongue. No point in confusing the nice young lady with history.

Then, they wanted to know about the "fiscal cliff". Surely, something will be done to avoid a catastrophe, won't it?

The fiscal cliff is a non-problem, we observed. It will turn out more like a 'fiscal water slide', we continued. 'It will be exciting for a while... and we'll all get soaked in the end.'

And it doesn't make any difference who wins the White House... either. What the economy needs is real stimulus, not the phoney stimulus offered by Obama and Romney. Not the measly spending cuts. Not the timid tax increases.

Most likely, the fiscal water slide will result in very modest "cuts" and very modest tax increases. The net effect will be zero, since the feds will both take and give, probably in equal amounts.

Real economic stimulus means the feds have to stop taking so much of the nation's resources... and stop directing them to unproductive zombie sectors. Real economic stimulus means a big cut in government spending. And big cuts in government regulations. And fewer bailouts...and subsidies...and giveaways. The zombies won't like it.

Real economic stimulus means more money and more resources in the hands of the productive sector where they can be invested in new, productive industries.

Real stimulus means more money for the future...and less for the past.

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