Government spending will perpetuate fiscal insanity

The economy is in a slump, but the Fed is printing up money to fix the problems. And what we see are a lot of mixed signals.

By , Guest blogger

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    Brian Sprague returns the nozzle to the pump after filling his car's tank with gas in Philadelphia on Wednesday. Oil prices have been shooting up, and food stocks are falling. Our economic outlook is confusing, writes guest blogger Bill Bonner.
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Gold up a buck. Dow up 61.

Housing still going nowhere…NAHB index flat for 4 months in a row.

Food imports inflating at a 30% annual rate over the last 3 months. Fuel going up at a 60% rate. The World Bank says food stocks at “dangerously low” levels…

Recommended: 'Fiscal cliff' 101: 5 basic questions answered

“Manufacturers squeezed,” by rising metals prices, says a headline.

Retails sales in January below expectations.

What can we say? Mixed signals. Confusing outlook. The underlying economy is in a slump. But the feds are putting out more and more hot money to try to fix it. It’s a Great Correction, in other words.

So, let’s step back one more time and take a look at the big picture…then we’ll return to our day by day reckoning tomorrow.

Steven Rattner, writing in The Financial Times, says we’re headed for a “fiscal nightmare.”

He puts the unfunded obligations of Social Security and Medicare at $50 trillion. Which is a lot of money. Even in this day and age.

And he notes, as we did, that Obama’s deficit cutting initiatives are puny and pathetic. In a nutshell, the Democrats don’t want to cut discretionary spending for infrastructure, education, health and other seemingly laudable goals. The Republicans don’t want to cut any money destined to maintain the security of the United States – also a worthy goal, if you put it that way.

Nobody wants to cut Social Security or Medicare entitlements.

That doesn’t leave much. It is as if the feds were trying to butcher a wicker chair. There’s no meat on it to cut.

By our reckoning, the feds collect about $2 trillion in taxes. They spend about $3.6 trillion. That is how we get a record budget deficit of more than $1.6 trillion this year.

They spend about $1.80 for every dollar in revenues, the greatest imbalance since WWII.

During wartime we can understand going deep in the hole. “Buy Bonds,” say the posters. “Support our Troops,” say the slogans. Lending money to the feds seems like a good thing to do; the alternative – defeat – would be such a drag.

But what is the emergency now? If the feds slow down their spending machine, what calamity will be upon us? What evil is so great that we should put the financial integrity of the nation at risk? Will foreign soldiers fill our bars and brothels? Will we have to surrender Bush and Cheney as war criminals? Will we have to pay reparations and lose Alaska?

Nah? Then what is it?

As near as we can figure, if we cut the deficit now we risk a return to sanity. That is, without the boost from government’s very stimulative fiscal deficits, the economy would have to operate on a more sensible basis. The feds could spend only what they could afford. People who rely on money from the feds would have to get honest jobs…or cut their own spending to bring it in line with their real incomes.

People could not spend money they got from the feds…after the feds borrowed it from someone else. So, there would be less money in the consumer economy, leading to all the big D problems – deflation, de-leveraging, defaults and depression.

In other words, without the feds’ activism, things might do what they ought to do. Debts would be written off, paid down, or restructured. Companies that depend on debt-fueled demand would go out of business. People who couldn’t make ends meet without some extra twine from the government wouldn’t be able to get their ends together; they could finally go broke and get on with their lives.

That’s what a correction is for – to fix the mistakes of the past…notably the mistakes caused by too much easy credit.

Instead, the feds seem determined. They’re doing the most remarkably imbecilic thing, no matter what we think here at The Daily Reckoning. Rather than let the private economy adjust to new circumstances…they will bankrupt the US government trying to keep the craziness going.

But we are libeling imbeciles, aren’t we? Stupid people would never think of doing such a thing. It takes a smart person with a lot of education. Because it’s not that easy to overcome common sense. You need a lot of brainpower to do something that stupid.

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