As a dangerous policy maker wakes up …

Contrary to most observers of Larry Summers’ odd sleeping habits, who tend to be rather critical of them, we think it is one of his most endearing qualities. While asleep, he can do no harm.

Unfortunately, as the Financial Times reports, he has apparently woken up:


The Obama administration made a strong plea to Congress on Monday to grit its teeth and pass a new set of spending measures – dubbed the “second stimulus” by some economists – in order to help dig the economy “out of a deep valley”. The call for action, which was made by Lawrence Summers, Barack Obama’s senior economic adviser, who urged Congress to pass up to $200bn (£138.9bn) in spending measures, came at the same time as Mr. Obama asked Capitol Hill to grant him powers to cut “unnecessary spending”.


This is certainly an interesting combination of ideas, perhaps it came together in that way because he only just woke up. Or maybe he didn’t know what his chief was going to say ‘at the same time’. Let’s see … ‘we need to do more spending, but we need to cut unnecessary spending’. Come again?

Memo to the planners: virtually all government spending is ‘unnecessary’. Certainly the idea that it is needed to ‘dig the economy out of deep valleys’ is entirely misguided (yes, we have said so before and explained why, but it can not be said often enough).



Larry Summers

Photo credit: Chip Somodevilla / Getty Images


Larry Summers, caught falling asleep during an economic summit, apparently for the second time (note Mr. Obama on the sidelines).

Photo credit: Chip Somodevilla / Getty Images


The article further states:


The move comes at a time when last year’s $787bn stimulus is wearing off. Mr Summers argued that it would be a premature move at this stage in the cycle to move to fiscal discipline. “I cannot agree with those who suggest that it somehow threatens the future to provide truly temporary, high-bang-for-the-buck jobs and growth measures,” he said. “Spurring growth, if we can achieve it, is by far the best way to improve our fiscal position.”


Improving one’s fiscal position by spending more money, that is something only a long-time government bureaucrat can come up with. The rest of us generally experience a deterioration in our fiscal position if we spend more money than we have, but evidently things are different on Planet Government.

In the faint hope that maybe someone might pass this on to the old-time member of the ‘Committee to Save the World’ (yes, this TIME headline referred to yet another, long-ago bailout, a more innocent time you might say, when everybody still thought bail-outs were a-OK), government spending can not spur growth, at least not of the genuine, sustainable, wealth-creating sort.

Only the free market can do that, and contrary to what is commonly believed, increased government spending is actually a burden on the economy that weakens wealth-generating economic activities by bidding resources away from them. The scarcity of capital and resources is a concept Summers has likely heard about, one presumes. It’s only a small step from there to the realization that government spending can not possibly do anything but dig a bigger hole for the economy.

Further down the article tackles the other side of the coin, namely the topic of ‘less spending’ (only referring, of course, to spending of the ‘unnecessary sort’).


Peter Orszag, director of the White House office of management and budget, said the measure would not only reduce spending but also discourage waste. “This is critically important both because we should never tolerate taxpayer dollars going to programmes (sic) that are duplicative or ineffective and because, especially in the current fiscal environment, we cannot afford this waste,” he said on Monday.

Previous efforts to give more powers to the White House on spending bills have been met with scepticism on Capitol Hill because lawmakers would have less control over the fate of any special projects they support. “We look forward to reviewing the president’s proposal and working together to do what’s right for our nation’s fiscal health and security,” said Nancy Pelosi, House speaker.


Well, if it’s so ‘critically important’ and even Madame Speaker is ‘looking forward to working on what’s right for fiscal health’, then surely it will happen? Less spending, I mean. On ineffective, duplicative, and waste type programs. But how shall we lead the economy ‘out of its deep valley’ with less spending? I refer you again to Christina Romer urges more deficit spending, where I list a few of the programs (more can be found at Mish’s blog) that received government funding on account of ‘Stimulus, Round One’.

One wonders if any of those are in Orszag’s sights? Whatever will we do if no-one studies ‘the hook-up behavior of female college co-eds’ anymore, or ‘renovates lighthouses on uninhabited barrier islands accessible only by water in areas that have been empty for decades (for the extra-cheap price tag of $1,5 million, I might add)? Given that without these things the economy will likely never find its way out of the deep valley it currently inhabits, I cannot imagine them going that far.

Here is a (safe) prediction: government spending is going to continue to rise, and should the stock market go down much further, the printing press will be revved up again as well.


Post Scriptum :

Speaking of the stock market … as Mark Hulbert notes, there is now a lot more bearish sentiment than there was previously. A swift plunge in stock prices often achieves that, and one must be careful to read too much into it (to the extent that falling prices themselves create bearish sentiment it is not particularly relevant, but extremes often do produce at least short term lows ).

Looking at the SPX, after peeking briefly below the ‘Flash Crash’ low (we have a new term for the investment lexicon!), i.e. the ‘sorry, no more bids‘ day earlier in May, the market decided to stage a comeback late in the day.

This often warns of a reversal, but it is not a guarantee of one. Anyway, ‘oversold’ readings have lately become pretty robust, and the only time when the market doesn’t bounce on such a confluence of readings is when it actually crashes.

Somehow that doesn’t seem a likely outcome at this stage though, so a bounce seems imminent. Gold stocks have already had a rather positive day, and they have often led the broader market a little, especially since the 2008/8 lows.

After briefly undercutting an obvious area of support, the SPX decides to close above it – click to enlarge.


A short term bounce would be in keeping with seasonal tendencies and the current state of sentiment, which has finally become rather bearish. However, the technical damage is considerable, and there can be no assurance this will work out the way we think it will.

A putative bounce may not go far, but we’ll take it a day at a time. Note here that the presidential cycle suggests that during the second year of the first presidential term, there is a pronounced tendency for the stock market to begin to decline in late April (so far so good) and only bottom sometime in October, prior to the mid-term elections. Caution remains the watchword this year.


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