Welcome to the recovery? No, Mr. Geithner, the Twilight Zone.

Treasury Secretary Geithner's recovery is a debt-financed nightmare.

By , Guest blogger

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    Treasury Secretary Timothy Geithner, accompanied by Health and Human Services Secretary Kathleen Sebelius, attends a news conference at the Treasury Department Aug. 5. In a recent article, he welcomed Americans to a recovery. Unfortunately, the recovery is built on unsustainable debt.
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Here we are at the end of another week. What have we learned?

Not much. Yesterday, the markets went nowhere.

So, we’ll think a bit more about Tim Geithner and the other men who rule us. Geithner wrote an article for The New York Times, “Welcome to the Recovery.”

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The gist of the article was that, though the recovery wouldn’t be quick and easy, it was still real and moving forward.

You can read the article and come to your own conclusion, but we wonder:

Is Geithner really as “out-to-lunch” as he appears?

Or, is he just in showbiz…and he realizes it’s time for a happy tune?

Our guess is that it is both. What is most remarkable about this whole episode is that the people who are most responsible for it – in the sense that they caused it…and that they now pretend to fix it – still show no evidence of understanding what it going on. Geithner did mention that households were paying down their debts. But he did not seem to connect the dots. He saw debt repayment as a sign of recovery, when it is actually the source of the slump. Neither he, nor Larry Summers, nor Alan Greenspan – and certainly not Barack Obama – has ever explained why we have a problem, what the problem is, or what is likely to happen as a result.

It’s really very simple. The private sector ran up too much debt. It didn’t have the income to support the debt. So, the bad debt has to be destroyed. Companies go broke – their stocks and bonds go to zero. Houses are foreclosed. Consumers declare bankruptcy. Banks close their doors.

It’s not really such a big deal, in the grand, cosmic scheme of things. And maybe true Keynesian stimulus would help ease the pain. But who pays attention to Keynes? He said governments should do what Pharaohs did – store up surpluses in the fat years in order to release the savings in the lean years.

As Eric Krause puts it, a Doberman will stock up sausages before governments stock up savings. So, when the crunch came, governments had no savings with which to offset the debt destruction.

Too bad. But, that’s just the way it is.

They might have admitted their failure and promised to do better next time. Instead, they decided to rescue the debt-laded economy…yes, you guessed it…with more debt!

The project was so loony from the get-go, it made us laugh. But some of the biggest names in economics – Krugman, Stiglitz, et al – are still pushing for more debt-financed “stimulus.”

The trouble with it is obvious, theoretically. Practically, it is even more obvious. In order to get money to give to the private sector, the feds first have to take it from the private sector. Ha ha…

(Or they can just print it up…a la Zimbabwe…but that’s a whole ’nuther ballgame…one we will surely get to!)

And now we’re nearly two years into the stimulus programs. What have we got? Here’s The Financial Times with an update:

The grimness of US unemployment

Sluggish growth – meet sluggish jobs. Initial jobless claims – the number of people who file for unemployment insurance each week – jumped by 19,000 to 479,000, its highest level since April.

Economists polled by Reuters had been expecting a decline to 455,000.

After declining sharply in 2009, jobless claims have stayed in the same range of between 450,000 and 460,000. A number closer to 400,000 is what you would expect for an economy with sustainable jobs growth, according to the FT.

What makes unemployment especially grim is that it now lasts so long.

As we reported earlier this week, more than 1.4 million people have become members of the “99ers club” – people who have been out of work for 99 weeks or more and have exhausted their unemployment benefits.

Two years without working is a long time. You lose your job skills. You get so used to not working that working becomes hard to do. And employers see you as a risk, because you’re no longer active in the labor force and have not kept up with the latest trends in your field.

Many of these people may never work a real job again. Instead, they’ll be marginalized for the rest of their lives…along with the millions of others who have given up real careers and real incomes.

So…

The stimulus campaigns have wrought pretty much what we expected. Instead of stimulating the private sector, the feds have replaced private sector spending with government spending. Government spending and investing is notoriously inefficient – which is to say, the politicians waste money. Much of the spending goes down a rat hole where it neither improves peoples’ lives nor stimulates economic activity.

Since the counter-cyclical spending began, about $2.5 trillion has been put to work. What has it produced? More jobs? Nope. Higher incomes? Definitely not. Higher asset prices? Maybe.

Geithner’s response is that “it would have been worse if we hadn’t done anything.” Here at The Daily Reckoning, we don’t believe it. It would have been better if the feds had let the market clear…

Let it happen. Let it be. Let the chips fall where they may…so that others can pick them up and get to work again.

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