World Affairs Brief, October 30, 2009 Commentary and Insights on a Troubled World.

Copyright Joel Skousen. Partial quotations with attribution permitted. Cite source as Joel Skousen’s World Affairs Brief

IS THE STIMULUS WORKING?

Yes and No. Yes, in a temporary artificial way; but not in the long run. Direct injections of cash to buyers as in the Cash for Clunkers program worked, but only until the money ran out. Total cost of the program to taxpayers was $24,000 per car! The $180B tax rebates “worked” (in an inflationary way) last year, but can’t be sustained. House price declines leveled off in tandem with the government’s $8000 incentive program, but new home sales have dropped again, proving that temporary stimulus only works as long as there exists potential first-time buyers who can afford a loan. Once that group was exhausted, housing prices started down again. Congress is now looking to broadening the program for everyone to keep the stimulus going. It would be a greater boon to the economy to simply let house prices fall further, making them more affordable in the long term for everyone.

One of the problems created by past incentives is that there were plenty of ineligible applications for rebates, so now the IRS is being forced to audit manually all tax returns claiming the $8,000 federal housing new home credit–causing long delays.

The stimulus money is actually concentrating its effect on the speculative markets, fired up by the “carry trade” in dollars. A carry trade is created when one government offers below market interest rates for borrowing currency, just as Japan did during their decades-long recession. The money is borrowed and invested elsewhere (carried) and the investor pockets the interest rate difference. Now it’s the dollar dominating the carry trade instead of the Yen. Insiders can borrow at the Fed for almost zero interest and invest those dollars in other nations and in any number of hedges with a profit potential. That’s how the biggest US banks, in a declining economy, showed such massive profits less than a year after government bailouts.

Countries like Brazil are trying to take advantage of this new speculative influx of dollars in the carry trade. The government just slapped a tax on foreign investors of 2% on all foreign purchases of Brazilian fixed-income securities and stocks, effective immediately.