Obama Stimulus Goes to…CHINA?!?!?

Inquiring minds are asking why hard earned American Taxpayers money is being used to fund China’s slave economy. Just another way of looking at The Stimulus and why it is bad policy:

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

This is correct in its first assumption: that emerging economies end up ‘stealing’ the stimulus from the host country it was intended. However, what is disconcerting is the second part…the idea of run-away inflation:

Rude Awakening

Deflation prophets in the West are in for a rude awakening. Eastern fire will turn Western ice into a mess, and 2012 looks like it will be the year of melting. The fuel for the fire is coming from deflation-fighting stimulus programs, such as that of U.S. President Barack Obama.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Beware of ‘panaceas’. Isn’t that the word the snakeoil salesmen used when saying there product would cure the incurable diseases of the 19th century? Didn’t work then either.

This is a common misconception not only in economics, but generally in life. It is from the human condition to look at a problem in a linear equation. Usually thought of as a straight line or, at most, a parabolic or logrithmic function.

However, that is not actually the way nature or the universe work. In the natural world functions are almost always discontinuous with a point of inflection. When that point is reached…disastrous results occur in the opposite direction. Think of any economic bubble ‘popping’. That is the point of inflection.

This writer makes the mistake that he knows more than the deflationists. It is false pride. No one knows the future and maybe we won’t reach this point of inflection during this crises. But at some point it will be reached. The reason the deflationists feel we are there is because they see ‘differences’ this time. The stimulus ISN’T working as it should. Prices are dropping.

The author of this article states:

Much of the “heat” comes from the property market in emerging markets. Million-dollar flats in Mumbai have panoramic views of the city’s slums. Hong Kong’s real-estate prices have almost reclaimed their 1997 peak, though the economy has barely grown since then in per-capita terms. Overpaid bankers who pay 15 percent income tax in Hong Kong are stretched to buy Beijing or Shanghai properties. Moscow is somehow always near the top of the list of the world’s most expensive cities.

What this author is missing is that these governments (especially China) are providing stimulus for their economies…and they don’t have a free market to keep them honest.

Deflation occurs when debt becomes so onerous that service of it becomes impossible and the economy falls flat. In other words, when it reaches the point of inflection.

In short, beware the point of inflection.


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