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August 03, 2009

Cash for Clunkers with Bread and Circuses in Pax Americana
by Michael Pento

While I was on a bull/bear debate last week on CNBC Reports with Dennis Kneale, the host referred to our country as Pax Americana. The name was given in reference to the Pax Romana (an era of peace and prosperity enjoyed by the Romans in the first and second century AD). But, like the Roman empire of the second century, we have now resorted to our own version of Bread and Circuses in the form of massive deficit spending and currency devaluation. I can think of no better example than the "Cash for Clunkers" program sponsored by the Administration and Congress.

The House of Representatives has now passed a bill allocating a total of 3 billion dollars for this insane idea. Like most of this administration's plans, this one is being sold by sublimation. In this case, the idea is to exchange gas guzzlers for more fuel efficient vehicles rather than the honest approach, which would be to tell the American consumer that we will continue to mortgage our future for the present.

To even propose such a plan is to ignore the catalyst for what brought the global economy to its knees. If one realizes that debt, inflation and lack of production were the illness, how can more of the same be the prescription? How can an economy that has a record amount of debt become healthy by borrowing billions more from the Chinese to buy vehicles made in Japan? Again, we misdiagnose the problem by believing it is a reduction of borrowing and consuming that needs to be reignited.

It is increased production and decreased consumption that we need. We need to boost savings and pay down our debt. We need to start saving as a country by creating a current account surplus instead of consuming foreign goods and services. Lastly, we need to be increasing our savings by purchasing capital goods that can increase the country's output and wealth.

For me this is more evidence of today's immediate-gratification mentality. Instead of saving money and deferring a new vehicle purchase, we have decided it is better to pull forward future demand on the back of increasing the public debt.

There is a lot of talk about fiscal and monetary discipline in the future but with each passing day we continue to stray further away from that concept. The truth is we have to increase interest rates and absorb excess money supply at sometime in the near future or risk runaway inflation. But despite all this talk about the deleveraging that is occurring in our economy--since our Federal Government is increasing spending at a 22.6% annual rate in Q1 2009--we have actually increased the total debt in our country. That means that when rates do eventually rise, we will face an even greater problem with debt service than we experienced in 2008. This is why the chances for a double dip recession in 2010 (or whenever the Fed decides to take their pedal off the metal) are virtually guaranteed.

Clearly the economy is in the process of exiting this recession. However, the healing has not been built on the back of healthy and viable growth. It has been the result of making available for loan a virtually unlimited amount of money for free and by increasing our borrowing by trillions of dollars. That is not the kind of growth that can be sustained by the free market. It is instead exactly the type of unbalanced, inflationary and debt induced growth that brought our economy down in the first place.

And that is merely the kind of growth that distracts the population from the eroding economic base while the citizens are enjoying the government sponsored "Bread, Circuses and now Toyotas."

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Michael Pento
Chief Economist
Delta Global Advisors, Inc.
800-485-1220

With more than 16 years of industry experience, Michael Pento acts as chief economist for Delta Global Advisors and is a contributing writer for GreenFaucet.com. He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

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