Sprott:  Beyond the Stimulus – August 2009

Are you stimulated yet? We hope you are, because we’ve just witnessed the largest economic stimulus in the history of the world. Never before have so many government dollars been thrown at the economy to prevent a depression. When added together, the combined financial, monetary and fiscal stimuli in the US are more than the cost of the two World Wars and “The New Deal” combined.

Stimulus spending worldwide has taken the form of a combination of tax cuts, transfer payments (free money) and infrastructure investments on roads, schools, railroads etc. In the US, the financial and stimulus contributions have been especially impressive in scale. According to CNN’s bailout tracker, the various US government departments have committed to stimuli worth $11 trillion dollars and have issued cheques totaling $2.8 trillion dollars thus far in 2009. Neil Barofsky, the Special Investigator General for the TARP program, has estimatedthat the total cost to the US taxpayer could be as high as $23 trillion. The vast majority of this stimulus has been directed at the financial sector – a complete waste of money in our opinion, supporting a segment of the economy that never deserved to be bailed out. Nonetheless, the US taxpayer has spent massive sums, committed to promises worth even more and may ultimately owe debt in the double-digit trillions when all is said and done. Nice of them to spend so generously, wouldn’t you say?

Although the stimulus has been fantastic for the stock market, it has generated very little benefit for “Main Street”. To make matters worse, the effects of the stimulus packages have already started to wear off. To explain why, we must mention the American Recovery and Reinvestment Act of 2009 (ARRA), which was specifically directed at stimulating the real economy as opposed to “saving Wall Street”. ARRA calls for a total spend of $787 billion, which breaks down into $287B in tax breaks, $192B in direct aid and $308B in discretionary spending. According to Christina Romer, a White House economic advisor, 70% of this stimulus will be spent by the end of September 2010.

Sprott August 2009