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article imageTax Rebates in June - Is the stimulus package good or bad? (op-ed)

By Thespian     Jan 24, 2008 in Business
We can expect some tax rebate checks around June.
A friend of mine asked:
"Does anyone else see this as a band-aid solution that won't help the economy in the long run and will in fact make things worse...?"
To which I replied:
Tax Rebates in June - Is the stimulus package good or bad
Background:
http://news.yahoo.com/s/ap/20080124/ap_on_go_co/economy_stimulus
We can expect some tax rebate checks around June. A friend of mine asked:
"Does anyone else see this as a band-aid solution that won't help the economy in the long run and will in fact make things worse as it will just increase deficit spending thereby further weakening the dollar and subsequently the economy?"
to which I replied as follows:
I agree.
The current stimulus plan will help, somewhat, in the short term, and we may have no other choice, but it is a long-term poison. We are in this mess precisely _because_ the Fed has kept rates low, and pumped more and more fiat currency backed by nothing but debt into the economy for so many years, that we have a negative savings rate. The sub-primes were just a consequence of an inflated money supply pushing all this debt-backed cash into any investment vehicle it could find. Now that the bill is coming due, all the assets, homes, stocks, etc, are heading for a serious bit of deflation.
The current rebate will prop things up for a little while, and may be necessary, but in the end it just makes the root problem worse. It is like drinking more alcohol when you start to feel a hangover coming on. It helps for now, but just makes everything more painful later.
There are really only two (painful and unpleasant) ways out of this at a systemic, root-cause, level. The first is to let the economy crash and burn, and suffer through a long, hard depression. 10%+ unemployment, trillions of dollars of paper wealth wiped out, etc.. etc.. Basically, pay the piper, deal with the consequences of our actions, and let the full force of the consequences of so much debt-financed spending work their way through the system. After a while, we will be more poor, and the rest of the world will get a chance to buy a good chunk of American assets at bargain-basement prices.
-or-
We tread water for a while with stimulus packages and further fed rate cuts, extending the long term problem to buy us time, while we address the systemic root causes to start mitigating the eventual crash. That means we stop running a deficit in the year-to-year government budget and start running a surplus, and start paying down the debt at a rate _at least_ more than the interest we currently owe. We have to make a dent, however small, in the principal. One way or an other, that means increasing taxes
and cutting spending and government services and programs. Politically, this is infeasible, but is the right thing to do structurally.
When you find yourself in a hole, the first step is to stop digging. This approach also will spike unemployment, and slow the economy down, but with higher interest rates, outsiders will be more likely to invest in the US if they see the surplus being used to pay back debt. It's a sign of an improving situation, and investment is all about buying future growth now for cheap, before the benefits arrive later.
Just like personal finance, the cardinal rule to getting out of debt is to not debt one day at a time. It is politically infeasible to do what must be done, but any other course of action is merely sticking our children and grand children with an ever-increasing, pre-mortgaged lifestyle of debt.
Thespian
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