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By Steven Greer, MD August 16, 2011
The political left and the political right have been debating whether the Keynesian $787 Billion “stimulus package” (The American Recovery and Reinvestment Act of 2009 or ARRA) signed by President Obama in February of 2009 was effective. After passage, the unemployment got worse, surpassing the promised 8% maximum, and the country is now heading for a double dip depression. Based on that, the fiscally conservative right claims that ARRA was a failure. The fiscally liberal left, led by people such as Princeton economist Paul Krugman, asserts that the stimulus failed to lower unemployment because it was too small, and that a hypothetical worse economic situation was averted.
Meanwhile, Standard and Poor’s downgraded the U.S. Treasury credit worthiness by one notch (to AA+) due to the deficit and long-term forecasts of an even larger debt-to-GDP ratio. For the first time since ratings began, the U.S. does not have the best possible rating.
The debate over whether more stimulus should be tried has been muted somewhat by the S&P downgrade, but those in scholarly circles still talk about printing more money to spur the economy. The conservatives do not think this would work and point to the supposed failure of “Stimulus 1”.
This is all a debate based on a false premise. There never really was a stimulus package at all. Almost all of the money from the ARRA was essentially hijacked by the states in order to pay for pension benefits, union healthcare costs, and other expenses causing massive state budget deficits. Admittedly, there are little data to support this assertion that the funds were diverted because the government will not release the necessary information, but state and local leaders know. New York Mayor Mike Bloomberg acknowledged as much on Meet the Press (click here for the video clip).
The “stimulus” was a complicit handout to the same unions that got President Obama elected. Most of the ARRA money went to pay bloated benefits packages.
Recall, back in early 2009, President Obama was still riding a wave of popularity and momentum. The bad economy was still viewed as George Bush’s fault. Rahm Emanuel and Nancy Pelosi were rewarding the victors of the 2008 election and pushing for radical healthcare overhauls while they still had the momentum. The deficit was of little concern.
As 2010 turned into 2011, and the unemployment persisted and worsened, idiotic signs sprouted up along on our highways touting “A shovel ready job made possible by the ARRA”. President Obama made one public relations photo-op stop after another at small business supposedly hiring thanks to the ARRA.
Yet unemployment rose. The bulk of the $787 Billion was confiscated by state governments in the biggest heist in the history of the world, breaking the previous record for theft set by the bank bailout TARP of 2008 (The ARRA would never have been politically feasible if it were not for the George Bush’s, Hank Paulson’s, and Ben Bernanke’s TARP that desensitized us to such large spending numbers). The money was not getting to the companies that could actually hire employees. Almost exclusively, the “jobs created” were state highway or airport jobs. Small businesses “need not apply” for ARRA funding.
It gets worse. The ARRA was not the only “stimulus package”. The lesser known stimulus has come from Federal Reserve Chairman Ben Bernanke in the form of quantitative easing, better known as “QE1” and “QE2”. The Fed created new electronic money from thin air to purchase long-term Treasuries, thereby reducing the yields and keeping interest rates low.
The net effect of QE1 and QE2 was an artificially inflated inflow of money into the equities markets and “free money” for the Wall Street banks. The banks take the almost-zero-interest money, turn around and loan it out to consumers at much higher rates, making an arbitrage profit of hundreds of billions. The Wall Street lobbyists are pleased and the campaign donations flow back to the elected officials. In turn, laws like Dodd-Frank get watered down and neutered.
QE1 and QE2 also deflated the U.S. dollar. Presumably, President Obama and his economic team believe that a cheap dollar will spur exports and help the economy. Whether that works is debatable amongst economists. One thing that is certain about a cheap dollar, however, is that it directly translates into lower purchasing power for the average consumer. Oil, gasoline, food, cotton, gold and other commodities are priced in U.S. dollars, therefore the prices for those go up as the dollar goes down.
This impact is not captured in the rigged government metric for inflation, the CPI, because oil and food are not part of the equation intentionally. Ben Bernanke and Treasury Secretary Giethner publicly claim that the various stimulus packages and subsequent printing of money have not led to inflation. This is a ruse. The real purchasing power of Americans has diminished as gasoline, food, etc. have spiked.
QE1 and QE2 were nothing other than a welfare stimulus plan for Wall Street banks and union pension funds that hold trillions of dollars in stocks, designed to be so complex as to be incomprehensible to the public and dodge the Tea Party outrage that exists over TARP and the ARRA. GOP Presidential candidate Rick Perry recently called these actions by Ben Bernanke “Almost treasonous”.
If Obama wanted a real stimulus plan that would create real jobs, he could give tax breaks or grants for new hires. He could give grants and loans directly to small businesses. But he has chosen the aforementioned strategies. In other words, a true job stimulus package was never really attempted and debating whether the ARRA worked is a false argument.
Steven Greer is a financial analyst and portfolio manager, and former Wall Street sell side analyst.