Digger’s Friday Triple Play

When Stimulus Does Not Stimulate

Certainly we can expect that when the government spends a trillion dollars this will provide a positive statistical boost to GDP, if for no other reason that government spending makes up a significant portion of GDP. Where, however, does the state get the money to spend? Ah, as Hamlet might say, there’s the rub. There are only three ways the government can obtain funds to throw at all their shovel-ready projects and all three leave in their wake negative economic consequences.

The moral of the story is that we are right to be concerned that the Obama stimulus plan will not stimulate economic progress and will not usher in the next age of prosperity. Government spending merely directs scarce factors of production away from their most productive uses. Taxation, government borrowing, and monetary inflation all produce negative economic consequences. Real economic expansion is the product of wise entrepreneurs using capital that is funded by real savings.

Real economic expansion is the product of wise entrepreneurs using capital that is funded by real savings. Such economic progress results in more goods that can be purchased for lower prices. As we are seeing play out before our eyes, the only thing that government stimulus plans stimulate is capital consumption and fewer goods available for higher prices — not a recipe for economic recovery.

Credit Expansion, Crisis, and the Myth of the Saving Glut

In the stock market bubble and even more so in the real estate bubble there was both large scale overconsumption and malinvestment. These are the two leading features of booms as explained by the monetary theory of the trade cycle developed by Ludwig von Mises. In both cases, the rise in the price of major assets—most notably, stocks and homes respectively—led people to believe that they were richer and could thus afford to consume more. In both cases, particular branches of industry were greatly overexpanded relative to the rest of the economic system, resulting in a subsequent major loss of capital. In the stock market bubble, the malinvestment was mainly in such things as the “dot.com” enterprises that later went broke. In the real estate bubble, it was in housing and commercial real estate.

The real estate bubble, like the stock market bubble before it, was caused by credit expansion. The credit expansion was instigated and sustained by the Federal Reserve System, which could have aborted it at any time but chose not to. As a result, the Federal Reserve System and those in charge of it at during the real estate bubble bear responsibility for major harm to tens of millions of Americans.

Bailing Out Your Spendthrift Relatives

while there may be no fixed rules about how to deal with family members who are struggling financially, I believe there are at least two guiding principles.

The first is that family ties or no, you are under no moral obligation to finance someone else’s profligate lifestyle. Doing so is a waste of your money and it doesn’t really help the recipients of your largesse.

The second principle is that your primary duty is to maintain the financial security of your immediate family — your spouse and any children. So if you do decide to assist family members you believe are deserving of help, you want to do so in a way that won’t jeopardize your immediate family’s finances.

Digger’s advice:  If you do loan money to friends or family, plan on not getting it back and if you do, then great.  If you don’t, then you must know that from the beginning, it was a gift and money you could live without.

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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


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