The Yellow Brick Road

The official Obama’s budget is projecting a 1.9% GDP growth this year, in 2009. With the economy sinking at 6% rate this quarter one would say – impossible. I will say – let’s look at it.

1.9% GDP compound for 1 year is about $260 billions. So the economy has to manufacture $260 bln of extra stuff (let’s call it “widgets”) to meet Obama’s plans.

In other words, after $700 bln TARP, $900 bln stimulus and $1 trillion budget deficit (automatic stabilizer) the economy will produce $260 bln of widgets. Don’t forget that Bernanke is printing some money to enable that bro-ha-ha. It’s about $10 of stimulus to produce $1 widget. Maybe it’s cheaper to just buy those widgets in China?

No, we prefer to do it domestically. But, if printing money is such a great idea, why don’t we always do that? If running such a huge budget deficit is so effective, why don’t we always do that? The answer is in official stats – $1 GDP growth per $10 of stimulus. They are not stupid, and I don’t think they are very proud in what they do.

Shadow money

Never heard of M4? Bernanke discarded the money supply aggregate M3 and the blogosphere is jumping on that for years. I think he was right to do that. M3 was garbage. Enter M4.

The idea is that from strict definition of money supply as M0 and MZM the definition is expanded to more broad M1, M2 and M3. And then many economists are declaring that we simply don’t know what is the broad definition of money.

The shadow money is anything that could be converted into cash immediately at more or less expected rate.

Treasuries? Definitely. Investment grade corporate bonds? You betcha. GSEs? Auction-rate bonds? AAA asset-backed securities? Yes, all this is shadow money with all shades of grey. And most of them were private. A lot of them are gone already.

I heard the estimate on the radio that while the most strict MZM is running at $9 trln right now, the shadow money reached $30 trillion before the crash. After the crash they contracted to $20 trillion.

The government is fighting deflation. They are printing a trillion or two of more or less real governmnet money to compensate for ten trillion of evaporated private money. In the sum both the amount and the velocity of money will remain well below recent highs, i.e. the inflation is absolutely impossible as long as the eye can see.

The inventories

The Q1 and Q2 is the time of the huge decline in inventories across the economy. The first reason is that managers get scared. The second reason is that the inventories exist on the debt, i.e. they require some money to offset them. When the amount of money contracts anything that requires money to exist will contract, so the inventories fell.

The expected weakness of the dollar (because Ben is printing) produced some micro speculative boom in the commodities. Mish reported that speculators and producers alike are quickly filling all awaylable oil storages. When this bubble pops we’ll see the $20-$30 oil again. Everything related to natural resources is a “sell” now.

Interesting, the sharp decline in oil prices may conside with sharp increases with domestic manufacturing inventory bild-up. That could be the moment when we’ll see the trade surplus for the first time. And yes, it may produce positive GDP growth for some time.

The consumer

Yes, we’ll get the GDP growth but it will not stick. I was writing before that the consumer will not come back anytime soon. The only consumer is the government with its stimulus, but the political cost to extend the stimulus when GDP turns positive will be too high and the government will have to pull back. This is when all this gets stuck again.

So yes, we’ll see a positive GDP growth later this year. Expect it now but have no illusions. This growth will be a result of monetary viagra and it will fade as soon as the medecine evaporates

Edit:

Added next day: when government wants to print some money but is afraid to waste them on useless bridges to nowhere they must invest into something with long-lasting effect. For example give money to schools. This must not happen.