Is The Stimulus Another Bubble?

It seems that more Americans favor the big burst of federal spending to regenerate the U.S. economy when tax cuts are included. The number of opponents falls by about one third under those conditions.

I'm starting to think we're looking at the third bubble in a decade. When the dot com mania was peaking, I noticed that Amazon was valued at more than the total revenue of all bookstores in America from 1776 to date. Forget profit, just revenue.

Then after the stock market crashed, we saw people shifting their assets into real estate. It became a retirement plan for many Americans to buy a larger house than they could realistically afford, live in it for a decade, and sell it to someone else for enough money to retire on.

That's a plan that may work for an individual, but it doesn't work for the economy as a whole. Eventually, we learned that what the economy can't afford, huge numbers of individuals can't benefit from.

So here we are in the wreckage of that insanity and a third bubble seems to be developing. We've screwed up and lost much of our wealth as well as personal income. So we'll have the government print a bunch more money and everything will turn out fine.

Of course, we're dressing this up and not calling it printing money, but it works out the same. The government acts on our behalf and we pay an even smaller portion of it. President Bush refers to the aftermath of the immediate past bubble as a hangover. Nobody is talking about what the aftermath of printing a few trillion extra dollars and injecting them into the economy will be.

In September when TARP was proposed, commentators were speaking darkly of future years in which our taxes would rise or government services would fall as a result. Nobody says that anymore. We are bailing out segments of the economy, maintaining government services, and reducing taxes now. Maybe later, we'll increase them, but only back to where they were.

Are we thinking that this stimulus will put the economy back above its old trend line, so that future tax revenues, at old rates, will generate the cash to repay all this borrowing? Not likely.

I've long held the view that inflation is God's way of restoring reality when people insist on doing things on a large scale that just don't compute. This is one of those cases, leading me to the following bold prediction. The stimulus won't work well. We are headed further down and government spending won't do much to reverse it.

Eventually, people who are loaning money to the government at trivial rates will calm their nerves and want to do something different. At that point, interest rates will soar. I don't have a crystal ball, but 2010 is not going to be one of those spiffy, zippy recoveries from a recession that people are so hoping for.