Reader Response

by Larry Levin

A reader of this blog responded to yesterday's "best of" missive with the following...

"If the government spends hundreds of billions of dollars on roads and health care but there is no demand in the general economy for goods and services, much/most of the government spending will be wasted. It will NOT stimulate the economy."

I do not understand how this assertion can be true. When the government spends money on roads, the roads do not drop out of the sky. People build them. Some people who are capable of doing this are presently employed and are not available to build the roads. Other people who can do this are currently unemployed, possibly receiving a pittance of unemployment insurance. The construction program provides jobs for these people. Now they have money to buy stuff. Bottom line, building roads DOES stimulate the economy.

Thanks for all of the comments David. I'll do my best to make it clearer.

As I said in that previous article, without demand for goods and services there is no stimulus. Just because a construction worker begins to build roads, it is not axiomatic that he will spend his money on marginal goods; that is, things beyond what he needs here and now. If there is no demand, that money will be saved. If there is no demand, that money will go towards paying down debt. It will not stimulate the economy.

I do not understand why there is still confusion on this issue. There is ample proof that my position is correct, yet people want to ignore it in favor of believing that all money spent is "stimulus."

FDR tried to spend the US into prosperity in the 30's, but it failed miserably. His mad spending turned a recession into the Great Depression. All of his "stimulus" plans couldn't reverse a deflationary debt spiral.

The New Deal of the 1930s substantially and permanently increased the scope of the federal government as Congress and the President attempted to spend their way out of the Depression. After the stock market collapse in 1929, the Hoover Administration increased federal spending by 47% over the following three years! As a result, federal spending increased from 3.4% of GDP in 1930 to 6.9% in 1932 and reached 9.8% by 1940. That same year, 10 years into the Great Depression, America's unemployment rate stood at 14.6%. Did that "stimulus" on roads, bridges, and dams "stimulate" the economy? No.

Japan also tried to spend its way out of its debt deflationary spiral in the early 1990's.

The steps that Japan took included a 10.7 trillion yen stimulus package in August 1992 - a 13.2 trillion plan in April 1993 - 6.2 trillion in September 1993 - 15.3 trillion in February 1994 - 14.2 trillion in September 1995 - 16.7 trillion in April 1998 - 23.9 trillion in November 1998 - and 18 trillion in November 1999. The grand total: a whopping 118.2 TRILLION yen, which is about $1-trillion at today's dollar-yen exchange rates. Yet it was all for naught. The economy still suffered a "Lost Decade" of deflation and lackluster growth.

Frankly, Japan is just one year removed from "TWO lost decades" of deflation and lackluster growth. But wasting money isn't stopping the Japanese politicians. Last August Japanese officials announced another stimulus, this time 11.7 trillion yen. And then, just a few months later, officials announced an additional 5 trillion yen stimulus in October. But what the hell, if it doesn't work it couldn't be because the Keynesian claptrap is wrong - no - it just wasn't done properly or some other idiotic excuse. Just a few days ago Japan announced ANOTHER stimulus of 20 trillion to 30 trillion yen.

As an economic stimulus, it is clearly overrated. The money that the government spends has to come from somewhere, either via onerous taxes or debt. THERE IS NO FREE LUNCH.


Previous Day's Trading Room Results:

Trade Date: 4/1/09

E-Mini S&P Trades*
(before fees and commissions):


1) OTF buy @ 11:30am at 800.75 = b/e (1 lot)

2) 80% sell @ 12:00pm at 801.25 = +2.50 (1 lot)

3) IDVA sell @ 12:10pm at 801.00 = -1.50 (1 lot)

4) OTF sell @ 12:30pm at 802.25 = -1.75 (1 lot)

5) Algorithm positions (5)...combined Secret's and Algo total...+3.25


Electronic (YM) Mini-Dow:

1) None today



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