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"Beware of Greeks Bearing Gifts:" Why we should always be wary of stimulus

After an unsuccessful siege of ten-years, the wily Ulysses came up with the idea of concealing an invading army within a hollow horse, which was presented as a gift to the citizens of Troy and led to their downfall. Politicians have been following his example ever since.

Well. Here we go again. Another crises. Another raid on the treasury. This is a particularly interesting run in at least one respect. The New York Times ran an editorial this week against stimulus while the Wall Street Journal ran one for it. Here's the real shocker; I concur with the New York Times (that HAS to be one for the record books.)


As a person who has spent the majority of his career assisting distressed companies, I have little faith in stimulus as the term is often used (and legislated). Rarely can a government create legitimate demand. They can issue capital and they can provide spending money, but neither of those things can truly create demand.


What government can do is support business by encouraging a basic halt to the economy. What? A halt? How does that help?


Well-- demand really doesn't go away. It may lay dormant during a crisis, but it is still there-- hibernating until the crises passes and the arteries of commerce start flowing again. And like an animal that hibernates, the best thing to do is slow the metabolism. Governments can do this by making sure people do not starve, or freeze. They cannot do this by doling out capital to pet projects and social engineering schemes that will never create demand, because if the demand were already there-- the markets would have capitalized them already.


Its even worse when this is done with borrowed money. A debt that has to be serviced, and then paradoxically-- with bonds that pay less interest in yet another attempt to create demand with capital and cheap credit.


A more sane approach is to vote money to loan to the states, so that they can in turn loan money to businesses and consumers as necessary to support acute needs. And to wait it out. The demand will return and the money can get paid back. Now we have debt galore, capital to burn, and easy credit that will all come due someday in the future after the grasshopper has fiddled away his summer.


I understand our federal government feels they need to do something. Its a shame its a big (and expensive) something that will probably result in a big and expensive nothing. Except for the debt of course.


The Trojan's celebrated their victory over adversity at the end of their siege, and reveled before the tribute that the thwarted Greeks had left at their gates. That is until night fell. Then regrettably the bill came due, and there was nothing for the Trojans to do but learn a valuable lesson. Beware Greeks bearing gifts.


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