Buying dimes with dollars is bad business, government-funded or not.
It is no secret that I agree with Eric Sprott quite a lot. I have written several posts that feature Sprott's viewpoints
- SqueezePlay: Sit-Down with Eric Sprott - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=396617
- Eric Sprott Interview on CNBC - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=377859
- Eric Sprott Interview on King World News - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=360939
- Is Sprott in the Market Trying to Buy 10 Tonnes of Gold? - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=348703
- Five Questions About Gold The IMF Refuses To Answer - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=384031
- IMF Is Now Rejecting Prospective Buyers For Its Gold Stash - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=360779
In this interview, Sprott
My friend amassafortune pointed me to a new article by Eric Sprott and David Franklin that I again totally agree with. He lays out the ineffectiveness of the government stimulus, how small the return on investment is for all the new debt created. This is a topic that I have been harping on for months now. See Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428 and More on Debt Saturation Equals Diminishing Growth, Employment, and Capacity Utilization… - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=394221 .
There are two effects happening, both of which are bad. The government is not allocating the public's resources (the "stimulus" which is bought by debt which the public has to pay taxes on either through direct taxation or indirect taxation = currency debasement / devaluation) effectively. Notice I say the public's resources. The government has no resources of its own. This malinvestment at the macro level not only does not create the desired effect, but creates very little "good" effect at all. The government, in short, is a lousy investor because it has very little accountability. On top of that there is negative economonic impact because all this newly created debt has to have interest payed on it. When there is less economic output per each new unit of debt than it requires in servicing costs, then we reach debt saturation. All new debt has a declining marginal productivity. See the links above to show this very real phenomenon in action.
Eric Sprott: A Busted Formula
by Eric Sprott and David Franklin
Submitted by Tyler Durden on 05/28/2010 15:43 -0500
There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back.
But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain?
We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. "Bailout and Stimulate" has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. There are three recent, glaring examples of this busted "Bailout and Stimulate" formula in action:
Exhibit A: The United States
From the outset of this financial crisis, the US Government and Federal Reserve have spent prolific amounts of money to save its banks and stimulate its economy. According to Neil Barofsky, special investigator general for the Troubled Asset Relief Program, the United States has now spent approximately $3 trillion on various programs to stem the financial crisis.1 This figure is expected to be updated again in July.
This $3 trillion expenditure includes stimulus programs like ‘cash for clunkers’, the extension of unemployment benefits, infrastructure spending, the "Making Home Affordable" program, as well as the activities of the Federal Reserve. To measure what the fiscal stimulus has actually accomplished we looked to the US Federal budget outlays/receipts to gauge the impact of the stimulus on GDP.
Table A presents current dollar GDP increases year-over-year alongside current dollar budget deficits. Comparing the two in current dollars provides a sense of the hard dollar impact that stimulus spending has had on the economy. As the chart illustrates, the net impact of the stimulus contributions and promises made since 2008 have resulted in a combined budget deficit of close to $2.5 trillion dollars and an incremental net increase in GDP of $200 billion. A $200 billion return for a $2.5 trillion increase in debt represents a terrible return on investment. It implies that the net impact of the stimulus on GDP since 2008 has been a mere 9 cents for every deficit dollar spent. Buying dimes with dollars is bad business, government-funded or not.
READ THE REST OF THE ARTICLE