Bill Bonner for Money Morning

Dear MoneyWeek Online reader,

Et tu, Yankee?

Paul Krugman, Martin Wolf and the other big spenders are remarkably resilient. And cunning. On their advice, the world’s governments put up as much as four years’ worth of the entire planet’s savings to bring about a ‘recovery’. On the evidence of the last couple of weeks, it didn’t work. 

In the world’s leading economy, eight million jobs have been lost. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better. Still, fewer people have jobs now than when the stimulus began. Those workers earn less than they did then. And those who lose their jobs wait longer to find a new one. Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. Illinois has stopped paying its bills. California is laying people off wholesale. But instead of falling on their swords in shame, the economists behind the stimulus efforts are positioning themselves for an ‘I told you so’ moment. 

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In our last instalment, Britain and Euroland had just turned towards austerity. Alone among the Western nations, the United States of America pledged to stay the course, continuing its programme of counter-cyclical stimulus. Then, last week, the US Senate rejected a measure to extend unemployment benefits. Suddenly, we’re all austerians. 

Krugman was quick to distance himself: “As I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided.” ‘Spend now, cut later’ is still his advice. With so little to show for it, you’d think he’d be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending – even in a time of private-sector retrenching – makes  people better off? And even if ‘spend now, cut later’ were good advice, is there any evidence that they can do it? None that we know of. 

Based on the experience of the 1980s and 1990s, we observed last week that it didn’t seem to matter what governments did or what they said... the markets went about their business. Today, we add a further provocation. For proof, let us take a look back at the penultimate budget of the Clinton years. “Eight years ago, our future was at risk,” Bill Clinton congratulated himself on 27 September 2000. “Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice-President Gore and I took office, the budget deficit was $290bn, and it was projected this year the budget deficit would be $455bn.”

The Clinton team claimed to have turned things around. They claimed credit for a budget surplus of $122bn. This was the third surplus in a quartet… the only surpluses in US budget history after 1972. That year may be significant. Before then, the world did business in dollars backed by gold; if a nation spent too much, its gold would be called away to settle its debt. After that, the US could spend as much as it wanted; the gold parked in Fort Knox stayed put.      

So the deficits came year after year, like the children of Abraham. But in the 1990s, a remarkable thing happened. Practically the entire developed world began running fiscal surpluses. The US, Canada, Sweden, Finland, Europe. The entire OECD. From deficits of about 1% of GDP, budgets rose to surplus of 2%. This seemed to prove that civilised men and women, even in the time of paper money, can get control of their budgets. We knew they could ‘spend now’. It was beginning to look like they could ‘cutlater’ too.

In June 2000, Clinton administration economists predicted the surpluses would keep coming, rising to as much as $1trn over the next ten years. But the US economy seems to have gone from heaven to hell in less than a decade. The race that turned deficits into surpluses lost its magic touch within 18 months. By 2002, staggering deficits were back: nearly $3trn worth of them in 2009 and 2010 alone. 

The economists completely misunderstood what was going on. The triumph they celebrated was not in themselves but in their stars. They had just been lucky. They had kept up spending just as the Reagan team had before them, from $1.4trn in 1994 to $1.8trn in 2001. But interest rates fell. Credit grew. And the economy boomed. The Clinton-era boom is now the Obama-era bust. Credit is contracting. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won’t help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier.

So Krugman will be proved right after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say ‘I told you so’... and spend the rest of his career in darkness and confirmed delusion.

To read Bill’s thoughts, sign up to Money Morning’s free email at www. moneymorning.co.za.

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Market update

The JSE all share index slumped 0.29% yesterday. The gold mining index gained 0.43%. Resources fell 0.65%. Banks and financials weakened 0.54% and 0.13% respectively. Industrials traded flat, down  0.03% and the platinum mining index jumped 0.89%.

London's FTSE100 climbed 0.66%. The Dow Jones collected 0.18% and the Nasdaq traded flat, up 0.09%.

Tokyo's Nikkei closed down 0.18%. Hong Kong's Hang Seng traded flat, down  0.06%.

Brent crude is currently trading at $73.95 per barrel.

Spot gold's trading at $1,199.21 down 1.08% and platinum was last quoted at $1,516.00.

And here's how the rand is performing against the major currencies:
R/$ 7.62
R/₤ 11.42
R/€ 9.58

Click here for the latest stock market news and charts.

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