Bush and Paulson are talking up the need for economic stimulus. This usually means more government deficit spending, one way or another. Don’t these guys understand that when the hole gets too deep, the first thing you need to do is stop digging? That maybe, just maybe, the route to a sound economy is savings and investment, not debt and consumption?

What will it take to lay the ghost of Keynes?

Edit: Coincidentally, an excellent piece by Steve Roach in the Financial Times points out the same issue:

As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies. Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession….

…. Washington policymakers and politicians need to stand back and let this adjustment play out. Yet the US body politic is panicking in response – underwriting massive liquidity injections that produce another asset bubble and proposing fiscal pump-priming that would depress domestic saving even further. Such actions can only compound the problems that got America into this mess in the first place.

Some of the myths that are being promulgated by the government, Wall Street, the NAR, the financial shill media and others. Believing any of these myths is a clear and present danger to one’s financial future.

• The Federal Reserve can manage the economy by skillful adjustment of interest rates and money supply. Neither recession nor inflation pose any real threat. The Fed commenced operations in 1913. Since that time, it has been unable to avoid inflation, stagflation, recession, depression and market crashes. Yes, we have had a long calm period of apparent growth, fueled by easy money and credit. But a high price will be paid. John Hussman goes into detail in numerous articles about this myth
• Even if the US slips into a growth recession, other economies around the world are strong and will quickly lead a recovery. The bubble is worldwide. It is already starting to burst in some of the EU countries, notably Spain and Britain. The most recent data shows deflation picking up in Japan as a result of slowing exports to the US. Steve Roach’s recent piece addresses this myth.
• Technology companies are largely immune to economic issues, because they do not need to borrow money. Exciting new technologies will continue to power growth. Technology companies are heavily dependent on the health of the economy. It is amazing that 2000 has been forgotten so quickly.
• The US consumer never falters and robust consumption will keep the economy strong. US consumers have been spending more than they earn by borrowing the difference, frequently using their houses as collateral. That borrowing is rapidly coming to an end and so will the growth in consumer spending. Recent warnings from retailers show this is happening.
• Problems with “subprime” mortgages are contained to the housing market and will not affect the economy as a whole. The widespread credit problems with corporate loans, commercial paper and various exotic instruments show that securitization of mortgages has served to spread the pain throughout the economy.
• House prices will resume their upward climb shortly, probably next spring. Now is a good time to be shopping for bargains. Inventories are continuing to grow at a time of year when they should be shrinking. Foreclosures and bank-owned properties are piling up. There are too many vacant units out there. Prices will not start to climb until inventories fall to a healthy level once more. The inventory trend is in the wrong direction. It will not turn quickly.
• Stocks are cheap. Stocks are richly priced, even based on record earnings. Analysts claim that they are cheap based on big earnings increases forecast for 2008. But earnings have already begun their cyclical decline with a fall in this quarter.

Those darn Chinese are cheating again. Don’t they know that increased government revenue should just lock in increased government spending? Look what happens when politicians don’t think they need to buy votes to stay in office.

HONG KONG (MarketWatch) — “Hong Kong Chief Executive Donald Tsang pledged to cut corporate profit and salaries taxes Wednesday as part of a wider goal to return wealth to the populace at time of budget surpluses.

In the first policy address of his second term in office, Tsang said stronger-than-expected revenue enabled him to cut the salaries tax for top earners to 15% from 16%, while the corporate profits tax would fall to 16.5% from 17.5%. The tax cuts are to take effect in the fiscal year beginning April 1.”

And people wonder why they’re doing well. Perhaps because their government is smarter? And more democratic? And less inclined to start wars? Yes, I know there’s no choice of party. But there isn’t in the US either, just the illusion of choice.

I remember some time ago Steve Roach wrote about the China Development Forum, where even the Premier (Wen Jiabao) sits down for free-wheeling discussions with outside experts, economists from around the world. Can you imagine George Bush being willing or able to do that?

Steve Roach pipes up from his new job in Siberia Asia. His point is one that I have made in the past - central banks cannot ignore asset prices.

“It is high time for monetary authorities to adopt new procedures–namely, taking the state of asset markets into explicit consideration when framing policy options. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.”

(Note: readability grades: Kincaid: 16.3, ARI: 16.9, Coleman-Liau: 16.5, Flesch Index: 22.4/100, Fog Index: 18.0, Lix: 57.0 = higher than school year 11, SMOG-Grading: 15.2 - must be a real economist)

And from the same Fortune section, we have Jeremy Grantham:

“There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S and EAFE from today and about a quarter less in emerging markets.”

And Jim Rogers:

“I have been and continue to be short the investment banks and the commercial banks. If they bounce up, I’ll probably short more. I’m certainly not buying anything. The market’s only down 8%. I don’t consider that a buying opportunity. The things that I’m short, some people probably think are buying opportunities, but I don’t. I’ve been short the banks for close to a year, and for a while it was not fun. But I added to my positions, and now it’s a lot of fun.”

And to round out the crew with a wistful note, we have Warren Buffett:

“In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to “model” rather than to “market.”"

From Steve Roach: “The label on the photograph sent a chill down my spine: “Reed Smoot, Republican of Utah, Senate Finance Committee Chairman, 1923-33.” Along with photos of other past chairmen, it was hung in the anteroom to the Senate Finance hearing chamber. The formal high-collared pose of the dapper mustachioed senator was the last thing I saw before I entered the hearing room on 28 March to testify on US-China currency policy before the Senate Finance Committee. The legislator from Utah was, of course, the co-sponsor of the notorious Smoot-Hawley Tariff Act of 1930 – a policy blunder of monumental proportions that played a key role in sparking a global trade war and the Great Depression. Some 77 years later, his spirit was very much in evidence as the Senate Finance Committee gathered to debate the “China threat.”

….I left the Dirksen Senate Office Building convinced that trade sanctions against China are now inevitable. ”

Yes, they are that stupid.