As all hopes for a US economic recovery are now pinned on the efficacy of
Washington's next stimulus package, President Barack Obama has opened the
bidding at US$825 billion. Most Republicans see this number as too big, and
many Democrats see it as too small. If the question is one purely of impact,
then under these circumstances, the Democrats are probably correct.
Measured against the erosion of some $20 trillion from American household
wealth in just two years and the waste of some $3 trillion (including long tail
medical liabilities) on a fruitless war in Iraq, populists and democrats will
label Obama's planned expenditure as relatively small. They will argue that to
effect a noticeable change in the $14 trillion US economy, a much larger
stimulus is needed. However, this would be the sort of change
that would paralyze the economy for years, perhaps decades.
From my perspective, the size of Obama's proposed stimulus may be just large
enough to prevent widespread dissatisfaction with government inaction but small
enough to leave room for a great opportunity - the genuine restructuring of the
American economy.
For the past 30 years, an increasingly socialist Congress has drastically
overspent in its errant attempt to "help" everyone. In so doing, it has
depleted the wealth of a hugely productive economy by consistently encouraging
citizens to consume more than they produce. Today, America's standard of living
is financed largely by depreciation of the US dollar, high taxation and by
massive borrowing, from citizens, foreigners and from future generations.
The natural cure for such overconsumption is a cutback in consumer spending, or
a recession. But recessions, by nature, involve high unemployment. They are
socially painful and therefore carry a distinct political cost if leaders
cannot quickly bring recovery. Politicians fear recessions and are loath to
accept them as a natural cure of excessive spending. They are tempted therefore
to keep exorbitant consumerism alive, by a progressive and unsustainable
combination of taxation, inflation, currency depreciation and borrowing. What
is happening today is a classic example of this unfortunate political/economic
dynamic.
The tragedy is that this reaction prevents necessary restructuring and sustains
failed systems. While claiming the converse, the vast sums spent by government
have actually prevented the vital but painful restructuring of the American
economy.
Some argue that Obama's proposed stimulus package is not only too small, but
also too late. Ironically, this may be a benefit. If it does come too late, it
will prevent American politicians from "saving" individual industries and
companies that have no hope of sustainability. By force of circumstance, it
will allow a recession to do the hard and unpleasant job of restructuring the
American economy.
In short, the political or financial inability of Congress to fund a larger
stimulus package could be a major blessing in disguise. It may not help the
current office holders, but it could benefit greatly America's economy, its
citizens and non-US citizens who trade with America.
If Obama sticks to his expressed intent to spend on "real" job-creating
enterprises, there will be less and less money available for Congress to spend
on "rescuing" defunct industries, companies and jobs. All this presages a
possible major restructuring and turnaround in America's economic fortunes. At
long last, it's possible to see such events unfolding. However, it will only be
possible by a firm stance with no deviations.
This may mean that Obama's policies may more likely be supported more by
Republicans than by those in his own party.
To survive against a Democrat-dominated Congress, Obama must be able to speak
over the heads of Congress directly to the American people to inspire them to
accept the short-term pain of recession in return for the long-term gain of
economic revival and the return to America of genuine wealth-creation. For
those listening, there was a whiff of support for capitalism in his
inauguration speech. Let's hope his words were not merely fig leaves.
Therefore, as strange as it may seem, a stimulus package that is both too late
and too small may be just the blessing that America needs to restructure its
economy and return to the generation of long-term wealth-creation.
John Browne is senior market strategist, Euro Pacific Capital. Euro
Pacific Capital commentary and market news is available at
www.europac.net. It has a free on-line investment newsletter.
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