Dr. James Galbraith says, “In principle, economic growth can come from household consumption, business investment, government spending, or exports. This is a tautology, indisputable and known to everyone who has ever opened a textbook...”

Well, yeah. Note the “in principle,” though. Snort. What about in practice? Practically speaking, economic growth can also come from stealing. But be that as it may…I’m making fun because I am in disagreement with Dr. Galbraith, Dr. Krugman, and a bunch of other smart people regarding the fiscal stimulus and I am too insecure to take them head on. So I will occasionally be snide. It’s a weakness but I accept this flaw in my character.

But less about me and more about why I am confused…

If household consumption is down, business investment is down, and exports are down (as they are), only government spending is left to grow the economy. But to spend, you have to have money. Governments raise money through collecting taxes; sale or leases of government property or rights; seizure of money (or sales of assets) of an individual or entity (think Henry VIII and when he grabbed the Catholic churches); and borrowing.

(There’s also inflation, but bear with me. I’ll try to talk about inflation but no promises I’ll make any kind of sense. In fact, I make no promises, guarantees, or warrantees I make any sense on any of this. But I have foregone a shower to tip-tap all this down because I am on the verge of getting lost in not knowing.)

To get household consumption, business spending, and exports moving, people need jobs. Some economists (but not all and those who disagree aren’t all nutbars) recommend a massive stimulus/relief package to keep people earning. If we earn, we spend, and if we spend, the economy will recover because businesses that survive will start to hire, spend, and grow again, entrepeneurs will act on opportunities in the marketplace, and capital will again lend, confident their business borrowers will not default. This seems reasonable, especially when bolstered by argument that the Great Depression was only really put behind the country with the greatest stimulus package of all, World War II.

But I have concerns. (Leave aside stimulus brought on by war. We’re already in a war. Two of ‘em and that’s just the ones we know of. And look where we are.)

So I’ll try to go through my concerns as clearly as I can and risking looking an even bigger fool than I am. But experience has taught me that when the Village and the MSM are in complete agreement, something is very wrong. (I do not include Krugman in the Village. They agree with him, not the other way around.)

A. The stimulus package is predicated on the idea that people won’t sit on their money as they did in Japan during their last economic disaster that lasted over a decade. What is there to buttress this belief? Well, we have a culture of retail therapy and that's pretty powerful.

But when people got their $600 tax rebate stimulus check, did they run out to Radio Shack and buy remote controlled cars? No. Most went to pay down existing household debt, evidence the stimulus wouldn’t spur household spending at all.

Say government borrows money to funds contractors to build massive infrastructure projects. You have lost your job and all the benefits that went with it, but now have a job because of the stimulus. You are a subcontractor (just go get the business license now---we'll all be subcontractors in three years, unless you work for the government). It’s a crappy job and your client sucks, but some business is better than no business. The contractor pays your invoice every four weeks or so, and every time you buy groceries and pay your bills and for your health insurance, do you consider buying a new car? A new gaming console? A hot tub? Or do you pay off your credit cards because who knows if the job will last? Since you now work for yourself and are responsible for everything, you realize you need to do something to make more money for retirement, to send your kids to college, or a medical emergency fund for when you fall off a ladder.

There are always ladders.

So, do you buy new crap, pay down debt, or save for emergencies or for later investment to grow your lost wealth? If you're wise, you will do what you're not supposed to do and make Uncle Sam very sad. If you are foolish, you will do what the government wants you to do, and take on even greater risk of personal bankruptcy, which isn't as fun as it sounds. The choice is yours. I will ask you to please be foolish so I don't have to be---my own version of that fast-paced economic game, "Beggar Your Neighbor." Everyone's playing it.

B. The stimulus package is supposed to happen fast and not last long. It may or may not happen fast. But it won’t be short term. No way.

Back in 1929, we were a producing nation. Now we’re a consuming nation, so much so that an industry grew up to rent us metal boxes in which to store all the extra crap we have that won't fit in our houses. We simply buy more than we make---budget deficits are the norm for governments and households. And there is no quick way for us to become a trade surplus nation with the largest of our trading partners.

None.

But why should that matter? Why do I think we need a trade surplus?

The stimulus package is predicated on an economic recovery that will bring in money beyond what the government can borrow or print. It has to. But right now we don’t make stuff and export it. We import. Countries are more than happy to continue selling us TVs, gaming consoles, clothes, and so on, as long as we pay for them. They stimulate their domestic economies by building up their domestic markets with the money coming in from us buying their exports. That means they have capital to finance new ventures and create new jobs, all of which generate taxes that go for education, research, infrastructure, militaries, loans to certain superpowers, and the usual stuff governments do.

While we continue borrowing.

Dr. Galbraith believes that we have a limitless supply from which to borrow as we are the banker of dollars and every one borrows from us. But what if borrowers don’t want dollars but other currencies? And what if our borrowers start defaulting?

(And if Galbraith is right, then why bother making and exporting anything? We’ll just borrow and borrow and borrow…does this make sense to anyone with a checkbook and a Visa card? I mean, don’t we just end up being a monthly-payment nation? Is that a good thing? I don’t think so.)

I’m not the only one concerned about this.

Martin Wolf writes, via Yves at Naked Capitalism (h/t BDBlue):

Sooner or later....willingness to absorb government paper and the liabilities of central banks will reach a limit. At that point crisis will come. To avoid that dire outcome the private sector of these economies must be able and willing to borrow; or the economy must be rebalanced, with stronger external balances as the counterpart of smaller domestic deficits. Given the overhang of private debt, the first outcome looks not so much unlikely as lethal. So it must be the latter.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

I suppose if our nation is on the verge of bankruptcy, nation-lenders may drop trade barriers to our goods and let us export stuff we somehow start manufacturing. Owing people a lot of money often means they will help you if for no other reason than their own survival. Of course, the countries we owe money to could just take the hit and inflate their currency to cover debt. It would be rocky for ‘em, but their economies might survive, especially since they actually make stuff.

Ours? I dunno. But we keep borrowing.

What if lenders start demanding collateral? There’s Yellowstone or the Grand Canyon, maybe the Statue of Liberty. We could lease the rights to collect tolls on all these new roads and bridges we’re going to be building. Or maybe we can lease the rights to sell food and merchandise at all of our monuments. Or maybe we can sell of all that Iowa farmland and our forests. How much is a Sequoia going for these days?

Money always costs money---what are we willing to pay?

Okay, maybe I shouldn’t worry. Dr. Galbraith doesn’t:

And there is no fixed pool of credit! The entire purpose of the capitalist banking system under the Federal Reserve Act, ever since 1913, has been to create an "elastic currency" not subject to fixed limits to the supply of finance…

Call Switzerland for more printing press parts (yes, the presses for our money come from Switzerland)---the government needs to print more money. Is there no danger of inflation? Yes, but the general response seems to be that we will jump off that bridge when we get to it. I get that inflation can be helpful when carrying debt because you’re paying your debts with currency that isn’t worth as much. Except smart lenders index loans to account for such tricky maneuvers such as governments printing more money. So inflation doesn’t do us a bit of good and could cause harm because inflation is not benign.

And I am not including the borrowing we've already done to cover the debt the US government is trying because of CDS and other instruments. This alone could destroy our economy.

As Kenneth Rogoff wrote:

Most of the world's largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat. Many banks have already acknowledged their open-ended losses in residential mortgages. As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity and hedge funds. As governments try to avoid outright nationalisation of banks, they will find themselves being forced to carry out second and third recapitalisations.

Guess what? “Recapitalisation” doesn’t mean making the first letter upper case---it means more trillions going who knows where with no accountability and no end in sight. Amazing, isn’t it? My vocabulary is growing and growing.

C. The stimulus is designed to spur growth of the domestic markets through household spending. Okay. But our domestic markets are saturated, despite designed obsolescence, and people ain’t buying even with interest rates where they are. Rogoff also writes, “Central banks are already cutting interest rates left and right. Policy interest rates around the world are likely to head toward zero; the United States and Japan are already there.”

Interest rates that are less than zero aren’t interest rates. They’re fees. So why would you put your savings in a bank? You’d be paying for the privilege of them using your money. What do you get? FDIC protection? You may be better off holding cash. Maybe you could get into the piggy bank manufacturing business as that will be a growth industry.

Seriously, say you’re starting to do well at your subcontracting job, and you’re thinking maybe you’ll set aside some of the money you have because you have to generate wealth for retirement, medical crisis, kids’ educations, and so on. Where do you put it? Stocks? After what just happened to the market? Well, maybe---you know how much risk you can stomach better than I do. Real estate? There are a lot of bargains out there, at least, if you believe real estate values will go up.

How about AAA-rated bonds? Safe, better return---except how do you know those bonds are really AAA? Because Moody’s says so? Wasn’t Moody’s in on this CDS debacle? Why, yes. In fact, Moody’s and similar companies rated these financial instruments without really bothering to understand what they did or how they worked. They fucked up and in the process fucked you over.

The lot of them. As IRA has it:

As James Scurlock points out, the best analogy for the housing bubble is Enron. The housing bubble was a kind of fraud on a nearly unimaginable scale. The Fed lowered rates to reflate the economy starting in 2000, LIBOR on which ARMs are based dropped 5% in less than a year, Greenspan joined the sales team in February 2004 and suggested homeowners buy ARMs even though fixed rates were are at 40 year lows, lenders sold homeowners on the idea of taking equity out of homes to raise cash to make discretionary purchases versus supporting the tradition of preservation of equity to build wealth and buffer household financial emergencies, the lending abuses we're all now hearing about–liar loans, etc.–ran for years under the noses of the Fed and FDIC, and Wall Street sold mortgage securities to naive pension fund managers in Europe and Asia by the billions. All with hardly a peep out of the press. Which is, by the way, one of the reasons the mainstream press is getting into trouble as businesses: after years of failing to report on the Enrons until after the damage has been done, few believe or trust them anymore. Block quoted

Can you trust any of them now?

FTR, I can see something involving small direct loans and small business owners that bypasses both government (including the IRS) and banks. It relies on the existing underground cash economy that the working poor rely on to survive and criminals use to run their businesses. This sort of thing, like any black market, is a sign of entrepreneurial spirit, independent effort, and productivity among small businesses like the one you’ll be running unless you work for the government. But there are very serious and ugly downsides to this sort of stuff. I need to think about it some more, when I’ve taken a shower and am not awash in my own crapulence.

D. Let’s say trade barriers fall and we gain access to foreign markets to correct our trade imbalances. What exactly do we sell? Our mad skilz in the FIRE industries? That’s Finance, Insurance, and Real Estate, fyi. Wow, look how well we did there.

We may be able to sell some of our technology, but there’s a lot of competition. Pharmaceuticals? We already sell a lot of those products and at discount prices. I suppose we could screw over our trade partners by forcing the cost of medicine up. But both of these industries rely on intellectual property and a lot of our trading partners ignore international intellectual property law, so competition will enter the marketplace very soon after our products do. We could then subsidize manufacture, but that is counterproductive to doing this in the first place. And since we'll have to concede trade barriers here, our competitors will be selling their versions of our intellectual property, if not at the local drugstore, than on the black market. Or eBay. Whatever.

There are our potential technological innovations, especially regarding energy. But we are years from developing solutions that would be competitive if we develop them at all.

We have natural resources. Food. Timber. Coal. Will our people accept environmental damage from these extractive industries that will last for years in return for potential economic benefit now? We do it all the time, so I guess, yes. I know we could use practices that would be more sustainable to harvest timber or food, but if that stands in the way of people having jobs---and this means unemployed white collar workers, not blue-collar folks because no one gives a shit about them anyway---those practices will go to the wayside.

And there is no such thing as clean coal.

So who will mine, harvest, or manufacture these exportable goods? Exactly what skills do the white collar unemployed have to participate in this stimulus economy? Do they expect to be managing things? Well, managing a road project or a factory relies on abilities different than those of an account manager, but maybe that doesn’t matter. What does matter is that we may have an abundance of managers yet still have a lack of skilled tradespeople. Who will build the roads? The same people who always build the roads. Who will mountaintop mine the coal? The same people who always do, only now they’ll have fifteen managers, inspectors, regulators, blah blah blah, watching over them with no idea how mining gets done, and each one will make more money (with less risk to his or her physical well-being) than the gal running the bulldozer.

The more things change…

But let’s say we manage the trade barrier issues and dismiss the environmental damage and are producing exportable goods. What if no one wants what we’re selling? They’ll probably buy the food, though we need to eat, too. But timber and coal? There’s lots of competition regarding timber and maybe everyone else will say no to coal for the same reasons I say no to coal. But maybe not. I just don’t know.

But there is one more thing we could sell. And I'm not talking guns.

We excel at marketing, especially truthy marketing, which is just a con game with a college degree. But we’re in a jam, so in the spirit of P.T. Barnum, we create another bubble, bringing in truckloads of foreign capital in an effort to get a piece of the big returns. This time, though, we keep more of the money for ourselves and when that bubble bursts, everyone else on the planet gets suckered.

I see that as a possible scenario. It is, it seems, the answer to everyone's prayers: other people's money scrambling at our casino, and as we all know, the house always wins. Unless you're the man who broke the bank at Monte Carlo. Be just our luck, wouldn't it? Some tiny little country like Cuba comes in, places a tiny little bet, and wipes us out. Okay, we might kinda deserve it, but irony doesn't put food on the table.

Anyway, I think maybe the historical model we should be looking at is not the Great Depression, but the 1890s. The 1890s were rife with scoundrels (including Barnum) who became the good and great after they had stolen all they could steal. One of the greatest of them all? A fellow by the name of J.P. Morgan.

Wonder what ever happened to his bank.