You say stimulus, I say stimuli, let's crank the whole thing up

Air Wolf for the 21st Century

Readers should all read this article by the Telegraph’s indomitable economic journo, Ambrose Evans-Pritchard.  This flew under the radar a bit and is already about two weeks old (it seems this can be considered ancient history these days).  I came across the piece via a Google search for something unrelated that took me to Zero Hedge, which had spotted the piece and commented on it here.

AEP is one of the best economic journos out there, and he’s very high-profile and comes with all the bona fides, not fringe like many of the other very astute commentators out there in the webisphere.  I don’t know from which source he gets the “$5 trillion”, but he and the Telegraph are not the sort to pull that kind of number casually out of thin air.  It must have come from somewhere, perhaps a credible source somewhere close-ish to the action in Washingrab…Washingrad?. 

This confirms our view of another round of big monetary stimulus (QE v2.0) on the way.  Zero Hedge made a good point that we won’t see QE2 before the US November mid-term elections as the Dems don’t want to lose political points with the rising “Tea Party” movement and the general sense of irritation at fiscal and monetary madness. 

If you take this together with the fact that investors are talking about ‘fiscal drag’ hitting hard in 2011, we could well be looking at a first quarter 2011 explosion of monetary mayhem.

If the economy stutters enough to nullify all the gains from QE1 and FISCAL1, then we can expect calls for QE2 and FISCAL2 to grow louder.  Larry Summers, economic advisor to Obama, has already recommended a $200bn “mini-stimulus” and he is being backed up Nobel laureate Paul Krugman.  In fact Krugman is so hot for more stimulus he would regard Summers as a bit of a prude.  These guys are uber-Keynesians and are calling for a “kitchen-sink” stimulus strategy (Krugman’s actual words).  If influential people such as these have their way (highly likely in Obamaworld), we’re headed for the Mother of all government wealth destruction programmes. 

The kicker here is that US M3 is falling quite fast, and while other measures of money supply are managing to keep their heads above water due to all manner of Fed tricks, US price pressures are still softening in the near term.  That will embolden the decision-makers to crank up money provision without fear of stoking inflation. 

This can’t end well for the US dollar.  Gideon Gono starred in a movie like this and it’s is no Hollywood ending folks. 

Bottom line is that while there is a lot of noise and volatility and euphoria and gloom in the global economy right now, underlying fundamentals are running out of steam.  As AEP says of the US in his piece,

“The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century.”

If the AEP article is accurate and potential major new stimulus efforts are implemented, the developed world policy-makers will be steering us toward an economic abyss.  There is light on the other side of this abyss, but between here and there is not a pretty ride.

More US debt and more printed US dollars is simply not the answer and more of both will ruin real savings and undermine real wealth creation to the detriment of freedom and prosperity.