Obama Has No Clothes by David Galland 02/20/2009

FSO Editorials

OBAMA HAS NO CLOTHES
- The Casey Files -
by David Galland
Managing Editor, BIG GOLD from Casey Research
February 20, 2009

It would be unfair to pounce all over Team Obama this early in their administration. After all, while the Democrats bear a lot of responsibility for the knee-deep toxic mess now covering the floor of the engine room, the bulk of the responsibility has to rest on the shrugging shoulders of Obama’s immediate predecessor and those that came before him.

Early though it may be, however, it’s not too early to come right out and say what needs to be said: when it comes to the steps being taken to address the current crisis, Obama has no clothes.

Both President Obama and Timothy Geithner, the latest recipient of the Goldman Sachs Chair for Managing the Treasury, are on record as saying that the Japanese experiment in quantitative easing didn’t work. They say much the same about FDR’s New Deal. In both instances, they correctly point out that massive doses of government stimulus had no lasting effect.

If the history lesson stopped there, we could all nod our heads in agreement and go about our business.

Alas, the lips of Mssrs. Obama and Geithner keep moving… telling us with great confidence that the reason the fiscal exertions of Japan and FDR failed was only because in each case government didn’t act quickly enough, or with enough monetary vigor.

Having thus explained the shortcomings in prior adventures in stimuli, the administration promises that “this time it will be different” and wholeheartedly commits itself to acting decisively, quickly, and with stunning amounts of cash. By doing so, we are told, they will shock the economy back to life.

But this argument simply doesn’t hold water -- there is zero historical precedent for the notion that applying blunt-force government stimulus will somehow mechanically “shock” an economy back into productivity. A couple of bullet points:

When FDR came into power in 1933, unemployment in the U.S. had reached a high of about 25%. Despite tripling federal spending on the much heralded New Deal, the best unemployment number achieved was 14%, in 1937. By 1939, however, unemployment was back up to 19%. Now, there is some nuance in those numbers, because the calculations include some number of people on the payrolls of the New Deal’s many make-work programs. Yet, given the fact that those make-work jobs would have come to a quick end if the government had stopped its New Deal spending, the poor results of the FDR stimulus hold up.
In the Japanese crash, the government spent hundreds of billions supporting banks and businesses, buying U.S. Treasuries in an attempt to keep the yen cheap and so their manufacturing sector at work. As the economic morass dragged on, the government cut interest rates to zero, then eventually accelerated spending in a five-year experiment in “quantitative easing,” which involved funding all manner of public works projects and other targeted infusions of government spending into the economy.

Using the equity market as a proxy for the broader economy, the Nikkei fell from around 38,000 at the height of the bubble in the late 1980s, down to around 7,000. During the five-year period of quantitative easing, 2001 to 2006, the Nikkei rebounded by about 100%, moving back to the 14,000 neighborhood. Importantly, however, the minute the Japanese government stopped the spending, the stock market came tumbling back down to around 7,500, near where it hovers today. Note that at no point did it get anywhere near the bubble high of over 38,000.

In sum, the evidence strongly suggests that there is no permanent benefit to be gained from throwing a lot of money at an economy, though there is one clear negative: a steep ratcheting up in government debt. Of course, because the government doesn’t actually make anything, what we’re really talking about is a steep ratcheting up of your debt… and that of your children… and their children.

So, what’s going on? Don’t you think all the Obama’s horses and all the Obama’s men know this?

Maybe they do.

In earlier editions of this missive, I have commented that President Obama may be the best politician in U.S. history. How else to explain how a virtually unknown black man could, in just a few short years, become president. And do so despite a foreign father and two given names eerily reminiscent of two of the most vilified individuals in the current American ethos? Impossible, most would have said, if asked a few years ago. But here he is… undeniable proof of his political skills.

Not to be cynical, but what if, on surveying the landscape, Obama and his inner circle came to the following conclusions about the possible paths they could take in regard to the dismal economy:

Path One: Stand aside and let Mr. Market put on the leather gloves, pick up the truncheon, and get to work pounding the economic dislocations out of the economy. Or…

Path Two: Observe that, during the period of Japan’s quantitative easing, the economy actually did pick up, albeit on a cushion of growing government debt. Using the same approach, one might push the worst of the economic problems past the next presidential election. Given his political skills, that approach syncs up nicely with what is almost certainly Obama’s most pressing personal goal: to avoid at all costs the ignominy of being a one-term president.

Besides, Team Obama could rationalize, even though the quantitative easing will have no lasting effect other than sending government deficits through the roof (a fact that Obama has been very candid about), it will at least buy the new administration some time to come up with another plan that might actually work.

I sincerely believe that just this sort of calculation has been made, and not for practical economic reasons – but almost entirely political ones. Supporting that contention, a large part of the spending in the latest stimulus bill is slated for 2011, the year before the next presidential election is held. Coincidence?

Then there is the $2 billion earmarked for ACORN in that same stimulus bill. While I tend to dismiss the allegations about ACORN’s purported voter fraud as desperate measures on the part of the failing McCain campaign, what we do know about ACORN is that their primary mission is voter registration, and that they are very friendly to President Obama.

It’s all a big win-win… as in “yes we can” win-win the next presidential election.

The way the current mess will actually get cleaned up is through the adoption of measures that support, or at least don’t hinder, entrepreneurs running or starting businesses and expanding into new markets. What we have instead is yet another experiment in more government.

In this matter, at least, Obama has no clothes.

David Galland is the Managing Director of Casey Research, LLC., publishers of Doug Casey’s International Speculator which provides unbiased research and recommendations on the highest quality junior exploration companies.

Casey Research has also recently launched a brand new monthly advisory, The Casey Report, which focuses on the most powerful trends now driving the U.S. and global economy, and how to profit from those trends. As a special introductory offer, when you subscribe to either the International Speculator or The Casey Report before the end of July 2008 you will receive the other free of charge for as long as you remain an active subscriber. Plus, your subscription comes with a full three month money back satisfaction guarantee… so you have nothing to lose when you try these publications today. Learn more about this special offer now.