It is truly a strange state of affairs when the world leader who makes most economic sense is a former KGB agent from Russia. By contrast, the two most recent US presidents (educated at Harvard and Yale no less) have embarked on a spending program of which Karl Marx would be proud. Our own Kevin Rudd is following suit, but sadly for him, with a far smaller canvas.

Rest assured, virtually every act of government stimulus is likely to worsen, rather than improve the standard of living of those in the US, UK or Australia. What Keynesians and the beneficiaries of various stimulus packages fail to acknowledge (or more likely, choose to ignore) is the inevitable inflationary effect of the spending. (Further, the actual benefits of such Keynesian spending itself are questionable. As Bill Bonner of the Daily Reckoning reminds us, it was not FDR’s New Deal which led the US out of the depression, but rather, the onset of World War II).

Despite what Rudd might claim in his recent high school essay, the economic problems facing Western nations stem not necessarily from “extreme capitalism”, but from spending more than we earn. Spending more than one earns requires debt. Eventually, that borrowing needs to be repaid. If it can’t be, the debtor goes bankrupt. Usually, for sovereign nations, such bankruptcy is preceded by a period of hyper-inflation as the government frantically prints money to repay its debts.

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This of course, is of no concern to the Federal Government (or in fairness, the Opposition, who themselves were hardly stingy while in office). Not content with wasting $10 billion last December, Kevin and Wayne have stuck their hand in the cookie jar once more and found another $42 billion — $14.7 billion for schools (including $1 billion for science and language “laboratories” — whatever a language laboratory is) and another $6.8 billion for the likes of families with school children and farmers. As for the forecast deficits of $26.5 and $35 billion in the next two years — they are optimistic to say the least, predicated on unemployment hitting only 7%, an ambitious claim given the economies of our major trading partners, Japan and China have virtually collapsed.

The low point of the second stimulus is the $2.6 billion school child payment. As with the previous grant, this is nothing less than a transfer of wealth from those without school age children to those with school age children. It works by taxing childless couples (or singles) and giving those monies to families with school age children (who presumably then vote Labor at the next election).

Not content with fiscal stimulus, the RBA did what everyone expected and lowered rates a further 100 basis points. Great for homeowners, the media reported. Of course, why the RBA is looking after over-leveraged home-owners instead of responsible self-funded retirees is more due to the RBA apparently taking its lead from the media and bank economists.

Then there is the fact that too much borrowing and not enough saving got Western countries into their current predicament – what better way to fix a problem of over-consumption than by encouraging consumption! No doubt lower rates will allow working families to take more equity out of their homes for a holiday or a new TV. As for responsible self-funded retirees — well, let them eat cake. (Despite the usually very prescient Alan Kohler‘s calls for further monetary easing, higher interest rates during a downturn is not necessarily a bad thing, nor is it unprecedented, as Paul Keating and Paul Volcker bravely proved).

As for what the Government should have done — perhaps a tax cut on bank accounts under $100,000 to encourage saving or more initiatives along the lines of its insulation plan, which, may actually provide some collateral benefits. Of course, not everyone will be disappointed by the stimulus — those $950 cheques will in part, find their way into the loving hands of poker machine operators — Tabcorp shares rose more than 4% yesterday in an otherwise steady market.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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