Here is an article by Peter Schiff regarding the stimulus package:
Upping the Inflation Dosage
by Peter Schiff, Euro Pacific Capital | February 15, 2008
In perhaps one of biggest ironies to ever to come out of Wa****ngton,
this week Congress simultaneously pilloried major league baseball
players for using artificial stimulants to pump up their performance
while passing legislation to do just that to the national economy. Am
I the only one laughing?
In reality, the current slump in the U.S. economy is simply the come
down from years of financial doping in the form of skyrocketing home
values and easy credit. Rather than reaching for yet another syringe,
Congress should ask Americans to do what it demands of ballplayers:
play within their natural means. Unfortunately in the case of the
economy, the patient is already so juiced up that further doses may
not only fail to stimulate but may result in a trip to the emergency
room.
As the widely praised "economic stimulus" bill was signed into law,
the only dissent heard was from those saying the plan did not go far
enough. Speaking for those unheard voices who disagree with the
strategy entirely, I believe the most significant aspect of the plan
is that it creates a new and improved method for delivering
inflation.
Previously, the government has largely relied on interest rate
stimulus to keep the economy humming. In this method, money supply
growth, also known as inflation, is channeled through the banking
system. The Fed makes cheap credit available to banks, which then lend
out the new funds or use them to acquire higher yielding assets. As a
result, asset prices, such as stocks, bonds and real estate, have been
bid up to bubble levels. However, the inflationary impact on consumer
prices occurs with a considerable lag.
Now that rate cuts alone are proving insufficient, mainly because
banks are now so over-loaded with questionable collateral and shaky
loans that few can consider acquiring more assets or extending
additional credit (no matter how cheap such activities can be funded),
the Government is opting for a more direct approach. By printing money
and mailing it directly to the citizenry, the "stimulus plan" cuts out
all of the financial middle men and administers the inflation drug
directly to consumers.
If simply printing money could solve financial problems, the Fed could
send $10 million to every citizen and we could all retire en masse to
Barbados. However, more money chasing a given supply of goods simply
pushes up prices and does nothing to improve underlying economics.
Since this new money will go directly into consumer spending, without
first being filtered thought asset markets, the effects on consumer
prices will be far more immediate.
This politically inspired placebo will do nothing to cure what ails
our economy. The additional consumer spending will merely exacerbate
our imbalances, allow the underlying problems to worsen, and put
additional upward pressure on both consumer prices and eventually long-
term interest rates as well. The failure of the stimulus plan to cure
the economy will cause the Government, and the Wall Street brain
trust, to conclude that it was simply too small. Their next solution
will be to administer an even stronger dose.
My prediction is that over the course of the next few years,
successive doses of even larger stimulus packages will fail to revive
the economy. As the recession worsens and the dollar drops through the
floor and consumer prices and long-term interest rates shoot thought
the roof, politicians and economists will look for scapegoats. Few, if
any, will properly attribute the problems to the toxic effects of the
stimulus itself.
However, like all drugs, the biggest danger is an overdose. In
monetary terms an overdose is hyperinflation, which will surely kill
our economy. It is my sincere hope that before we reach that "point of
no return," a correct diagnosis is finally made. When that occurs, the
stimulants will be cut off, and the free market will finally be
allowed to administer the only cure that works: recession. If that
means we lose some speed on our fastball, so be it. Maybe we could use
a few months in the minor leagues to get back to basics. While we may
not like the economic side effects of stopping cold turkey, it sure
beats carrying our money around in wheelbarrows!
Copyright (c) 2008 Peter Schiff
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