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Is the Government’s Solution
Simply More Hair of the Dog?

(Sept.28, 2009) In an effort to get the economy back on track it seems the U.S. government is encouraging much of the same behavior that got us into this mess in the first place. The assault of federal programs launched appears to have one objective in mind and that is getting all Americans, collectively as consumers and businesses, to spend money we really do not have and shouldn’t be spending in the first place. The Fed’s intervention in purchasing treasury securities, along with purchases of mortgage-backed securities, has served to keep interest rates artificially low in order to encourage yet more borrowing. The first time buyer tax credit of $8,000 has sparked about a third of all purchase activity and an even higher percentage of sales activity, in the range of 64%, has involved distressed properties. Auto sales, similarly have been fueled by the wildly popular “cash for clunkers” program thereby depleting current inventories at the cost of snuffing out much in the way of future demand for vehicles.

The government has now taken over the role of the American consumer as the irresponsible runaway spender and the debt that’s reflected by the exploding deficit really belongs to the American people and its future generations. If the global economy is going to restructure as is desperately needed to cure the imbalances of production and consumption that persist, then current borrowers and consumers (i.e. the Americans) must become savers and producers and the current savers and producers (i.e. the Chinese) must become borrowers and consumers. Unfortunately the two nations are locked in a vicious co-dependent relationship where the Chinese people save and produce so Americans can in turn borrower and spend. Once the Chinese government cuts off the “debt junkie” that the United States has now become and instead chooses to spend its savings within its own borders and Chinese citizens crank up consumption of their products, that’s when the United States will truly begin to pay for the error of its ways.

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