My Two Cents - "I know what you did last rebate-time"

1/25/2008

We’d just finished a nasty fall in the stock market. Tech stocks had crashed, with the NASDAQ losing over 60% of its value. The economy was slowing down and a recession seemed imminent. Something clearly had to be done. The last thing a rookie President needs in his first days in office is a recession. What better an idea to curry favor with the voters than a tax rebate? I remember receiving my $600 Bushbate during the summer of 2001. Mired in graduate school tuition bills, I did the most un-American thing of all: I paid bills with my check. My rebate didn’t really stimulate anything other than my own sanity perhaps. However, in order for the rebates to stimulate the economy, the recipients of the money have to spend it into the economy. In theory, this will cause production to increase and growth to ensue.

We are assured that a mere $150 billion will kick-start the economy. I am 100% sure that the same follow-up tactics will be used that were called into service back in 2001: lower interest rates (which we’re already seeing), massive monetary inflation, and most likely the creation of one or more new asset bubbles. Got gold anyone?

Let’s put $150 billion dollars into perspective.

• It is a tad less than 3 months worth of US trade deficits
• It is a mere 1% of GDP; $150 billion of GDP is generated in less than 4 days
• It is a paltry 1.63% of the actual public National Debt
• It is an even more paltry .27% of the National Debt including unfunded liabilities
• It is approximately 7.5% of the money we’ve spent on wars since the last rebate
• It is a microscopic .02% of the approximate notional value of existing derivatives

Surely, $150 billion is not a lot of money is it?

• It is enough to pay an average family’s salary for over 3 MILLION years
• It is enough to buy 75 million plasma screen televisions
• It is enough to send the 5,000 school kids in my community to college 300 times
• It is enough to buy braces for 30 million kids

$150 billion is a lot of money.

One of the nasty little facts about inflation is that the initial recipients of the newly created money derive the most benefit since they are able to spend it before the inflationary effects of the new money work through the system. Generally the financial markets are the primary beneficiaries and disburse the money to the rest of us through loans of various types. Well as anyone who has been paying attention already knows, the loan business isn’t going so well these days. Funny how all those models they came up with to predict default rates have blown up. The point is the general public doesn’t usually get the first crack at fresh money.

To be totally honest, things are bad. Things are beyond bad. Things must be near epidemic proportions. Consider that it generally takes Congress at least a few months to find a new way to tax us, but yet it can take them less than a week to come up with a way to give it back. Think about that for a minute.

Running through a quick chronology since 2007 began, we first heard denials that there was any chance of a problem with the housing market. When the first substantial lender, New Century blew up, we were told it was contained, and that there was no way it could affect the broad economy. The next blip was in the capital markets in late February. Once again, we were told that everything was hunkey dorey. The problem simmered until late August, while in the background, broad money supply growth accelerated at an alarming rate. The first shot across the bow came in August, and again we were assured, although not so strenuously that it was contained. Another shot in November, and a direct hit at the end of the year, and the cat was out of the bag. The Fed blinked and has cut rates with reckless abandon, and suddenly the government is getting generous with money it doesn’t have. There is a definite progression here as well as a heightened sense of urgency. Something way in deep is terribly amiss.

So my question is a simple one: What are YOU going to do with your rebate?

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.