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February 11, 2009

Stimulus: Putting Hippos on the Titanic
by Paul Mladjenovic

Watching the stimulus debate is quite unnerving; we are witnessing eloquent politicians and confident bureaucrats that are really clumsy and clueless about the economy ready to do major damage to it. It is like watching a team of podiatrists ready to perform brain surgery. What we are witnessing has happened a thousand times before throughout history. As a financial planner, I have to understand what is going on because my clients, students and my Prosperity Alert subscribers need to understand if they are going to survive and thrive in these historic and challenging times.

First of all, my background lends itself to more clear-eyed analysis then the swill that is getting media attention. How so?

My family and I escaped communist Yugoslavia in 1963. For the uninitiated, communism is the full, 100%, iron-handed application of socialism. In other words, heavy-handed government bureaucracy runs 100% of the economy. Actually, the more complete thought is that government bureaucracy runs 100% of the economy into the ground. Socialism is history's more enduring and most destructive scam; it emanates from the Karl Marx School of economics. Karl Marx easily wins history's award as the greatest and most dangerous economic crackpot (on economics, Groucho knows more than Karl). Anyway, the only things that socialism produces in abundance are poverty and oppression. We came to America and my parents were part of the "working poor" but we were vastly better off (thank God!).

Yugoslavia tried to jumpstart its woeful economy by turning to a Keynesian "solution". In 1989, Yugoslavia enacted its "stimulus plan"; it went on a government spending binge. If the country was wallowing in economic squalor, where did the money come from? Simple....it was created out of thin air! In other words...INFLATION. It merely printed up the money and flooded the struggling economy with "spending". That was the final nail in the coffin for my former homeland. The "stimulus plan" brought on hyperinflation and Yugoslavia collapsed amid economic and social disintegration. By 1994, Yugoslavia was no more. New sovereign nations arose from the rubble (such as Croatia where I was born). The ruling elite in the former Yugoslavia thought (wrongly) that prosperity and wealth could be created or stimulated by simply using government force and a printing press. How wrong they were! What did we learn from this?

People serious about getting to the truth about economics learn that a healthy economy is the sum total of millions of buyers and sellers working hard and engaged in voluntary exchange (money for goods and services). They save, invest, innovate and produce. A healthy economy reaches equilibrium between consumption and production. Production is spurred on by profit which in turn creates more (and cheaper) goods and services for consumers. All of these are the essential components which form an intricate tapestry and can be generally described in one word; capitalism ("the free market"). History has told us time and time again that countries which embraced free market economics flourished and had rising standards of living. Countries that embraced more and more government tended to experience more and more impoverishment. Why?

1. Government is an instrument of FORCE.
2. Government does NOT have the power to create new jobs. It can only "create" a job by first destroying one (or more) jobs from the private sector.
3. Government gains resources (again, by force) from the private economy. It does not have its own resources.
4. Government manages (mismanages?) the nation's currency. It can print it at will.
5. Government may be able to stimulate spending but it typically HARMS production.

These points are CRUCIAL to understanding what is going on RIGHT NOW.

The public doesn't understand that the government can't make money and prosperity fall from the sky. All the governments in the world can use force (taxes, laws, etc.) but can't magically bring into existence a healthy economy as a result. If it were true that government can merely use its brute force to create a successful economy than all the totalitarian countries throughout history would have been prosperous paradises! No...the opposite is true. What does this have to do with today's economic ills and government plans? EVERYTHING.

The $1 trillion dollar stimulus plan will not stimulate growth in the economy. It will only stimulate the growth of government bureaucracy. Please understand that government doesn't invest in the economy; it SIPHONS resources from the economy. Think of the private economy as a "runner" and the government as the "backpack". Can you really make the runner perform better by loading more and more weight into the backpack? Of course not; you just make it worse for the runner.

In the alleged "stimulus package", "the devil is in the details". A good place to get the actual details of the so-called "stimulus plan" is places such as www.readthestimulus.org. You will find out that...

1. Most of the spending benefits government; not the private economy.
2. Little (none?) of the stimulus spurs on business start-up, innovation or expansion.
3. Even proponents of the plan admit that only 1 job will be "created" for each $200,000 spent (that number is an estimate since it keeps changing).

The question that I wish more people in the media should ask is...

HOW WILL THE NATION FOR THE STIMULUS?

In a recent press conference, the President was asked if the stimulus plan was really a spending program. His response basically was "Of course! What do you think stimulus is?" in a tone that insinuated that the reporter asked a dumb question. I didn't hear anyone asking him serious questions of how we will pay and where will the money come from. Let me answer that question:

THE STIMULUS PLAN WILL BE PAID FOR BY...

1. CURRENT TAXES and/or
2. BORROWING (PAID WITH FUTURE TAXES) and/or
3. INFLATION (A FORM OF HIDDEN OR "STEALTH" TAXES)
4. Footnote: Don't forget any interest that we will be forced to pay.

In other words, the President, his economic team and the leadership in Congress will be enacting a policy based on the economic ideas of John Maynard Keynes. Now we know the name of the second greatest economic crackpot in history; Keynes.

Keynesian economics got us into this horrendous mess. Hasn't anyone noticed that the economic teams of both Clinton and Bush were applying Keynesian economic ideas all along? Starting in 1995, these policies were the root cause of the greatest and most reckless period of consumption, borrowing and spending in our history. Today, America's economy is saddled with TRILLIONS in debt.

Spending and debt got us into this incredible catastrophe. What do our leaders in Washington want to do to get us out of this economic mess? A "government stimulus plan". It is a typical Keynesian "solution". What is it? It is...MORE spending and MORE debt. How? By using government borrowing, spending and inflating. Why? Because these Keynesian policy-makers think that stimulating consumption (more spending) will jump-start the economy.

Wrong, wrong, WRONG!

History clearly tells us that Keynesian economics does not work. At best, it can be a short-term bandage but it is not a long-term solution. Even Keynes admitted that his ideas have flaws that are problematic over the longer term. When someone pointed out the flaws and how they would become realized over the long run , he famously retorted "in the long run we are all dead". Well...he is dead and we are now in "the long run".

The trillion-dollar question is:

If Keynesian economics is provably wrong and logically bad,
why are our government leaders hell-bent on doing it anyway?

The answer is simple. Bad economics can be "good politics". They can spend lots of money that looks like they are doing something about the current mess (which is there because of them!). They can make speeches that sound great and make the public cheer. They can look like good guys riding in to save the day! Why not?! Look at the situation...

1. The politicians are not paying for any of this.
2. They will get the money from YOU (or someone who employs you)
3. They can spend and spend without any consequence to themselves. None!
4. No matter how frivolous they act is, they will still get their full pension and benefits.
5. In fact, if they are clever politicians they will even get monuments built to honor them (with your money, of course).

The bottom line is that this stimulus plan is nothing more than fraud, waste and pork. When you look at the litany of spending projects, they are predominantly political pay-offs to special interests and wasteful pet projects designed to enchant supporters and voters to maintain political power. This stimulus plan (and the ones that will probably come later) will do nothing more than pushing today's economic problems into the future and making them much worse later on.

It's as if the captain and the crew of the floundering Titanic told the passengers to stay calm because they are bringing hippos onboard to save the day. At least hippos can swim. What can we do about this? Here are some resources and action items:

1. Tell your representatives about the destructive nature of the stimulus plan. You can easily go to www.house.gov, www.whitehouse.gov and www.senate.gov. Not enough people are expressing themselves. They're supposed to represent you...tell them!
2. Learn about the flaws of Keynesian economics and share the knowledge with others (especially those in politics and the media). Check out the Austrian school of economics at the Mises Institute (www.Mises.org). They understand economics and they accurately predicted the problems with booms, bubbles, busts and government intervention. Check out the recent essay on Keynesian economics by Jeffrey Tucker.
3. Call or email your favorite financial venue (radio, TV or website) to request some of the better economic commentators. Some of my favorites are Mish Shedlock, Peter Schiff, Steve Saville, Jay Taylor, Roger Wiegand, Peter Grandich, David Morgan, James Puplava, Ken Gerbino, Jeffrey Tucker, Murray Sabrin, Marc Faber and Lew Rockwell. Forgive me if I miss some great names but this list is a good start.
4. As I have written in my newsletter and in recent articles, I am forecasting an inflationary depression. The current events and government "plans" make this forecast more than likely. Consider re-allocating your portfolio (401K plans, etc.) into investments that would survive such a scenario such as those tied to "human need" (such as food, water, energy, precious metals, etc.) I provide more news and views in the Prosperity Alert.
5. Inflation means that dollars (and other paper currencies) lose value over time (due to over-creation). Find out more about those things that gain value because of this such as gold and silver. Even do what may sound odd such as have a well-stocked pantry. What do you think a can of soup will cost as inflation soars? Tangibles and necessities with intrinsic value will hold up well as currencies head long-term into oblivion.
6. Stay informed about the general economy and financial markets. Some of my favorite commentators are broadcast (in MP3) at great sites such as Financial Sense and the Korelin Economics Report.
7. The Democrats and Republicans will not be our salvation. Personal freedom and responsibility is the key to a better future. Except for folks like Congressman Ron Paul, the only other source of economic sanity on the political landscape (that seeks to expand freedom and limit government) is a third party.

Yes there is more to learn and more strategies to grow and protect your wealth. But the important thing is that we must learn from history and use our logic and common sense since much of what circulates in the media is simply wrong. The lessons from my past bear repeating; For Prosperity, we need more freedom and we need to take greater control of our lives and our finances. If we let government grow too large and too intrusive, that spells economic decline and impoverishment. Remember Yugoslavia!

Paul Mladjenovic, CFP
www.ProsperityNetwork.net

Paul Mladjenovic, CFP is the author of Stock Investing for Dummies and his national investing & financial seminars are at www.ProsperityNetwork.net. His blog is at www.Mladjenovic.blogspot.com and he is the editor of the Prosperity Alert newsletter.

Copyright © 2006-2009 Paul Mladjenovic. All rights reserved.

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