Stimulus Does Little More Than Give Us an Economic Sugar High

GDP for Q2 came in far below expectation at an annualized rate of 6.5%. But despite being a big miss, 6.5% growth is still pretty solid — until you consider what it took to buy that growth.

As economist Daniele Lacalle pointed out, the Fed and the US government rolled out the biggest fiscal and monetary policy in history. All we got from it was a momentary sugar high.

With the Federal Reserve purchasing $40 billion of mortgage-backed securities (MBS) and $80 billion in Treasurys every month, and the deficit expected to run above $2 trillion, one thing is clear: the diminishing effect of the stimulus is not just staggering, but the increasingly short impact of these programs is alarming.”

As Peter Schiff put it, this is fake economic growth.

We had no legitimate economic growth at all. All we had was people spending money. And one of the reasons that they spent more money is because all the things that they were buying cost more.”

In fact, if we had a realistic measure of CPI, GDP may well have shown a contraction in Q2.

Regardless, governments and central banks continue to stimulate. But it’s like any drug. The more the addict consumes, the more the addict needs to keep his high. Lacalle said this is a growing concern.

In the United States, we should be extremely concerned about the short and diminishing impact of monster stimulus plans. Paul Ashworth at Capital Economics warned that this is more evidence that stimulus provided surprisingly little bang for its buck, and reminded people that ‘with the impact from the fiscal stimulus waning, surging prices weakening purchasing power, the delta variant running amok in the south and the saving rate lower than we thought, we expect GDP growth to slow to 3.5 percent annualized in the second half of this year.'”

A look at the economic data reveals things already appear to be slowing down. For instance, the saving rate is estimated to have fallen to 10.9 in Q2. This is close to the trend average of 9%. Private investment – the GDP component that signals the potential for real growth in the future – was down 3.5%. Durable goods orders only came in up 0.8% in June, far below expectations. Zeroing out transport, it was only 0.3%. Residential investment contracted by 9.8%. Even government spending has dropped, with federal nondefense outlays contracting by 10.4% – despite massive deficit spending.

Lacalle said it’s becoming increasingly clear all of this stimulus does little more than create an economic “sugar rush.”

This, again, is the proof that neo-Keynesian ‘spend at any cost’ policies generate a very short-term sugar rush followed by a long-term trail of debt and zombification. This disappointing 6.5% annualized gain in second-quarter GDP, well below the consensus at 8.5 %, is even worse considering the monster size of the fiscal and monetary stimulus, with declines in residential investment and a bigger drag from inventories.”

Despite the lack of bang for the buck, governments and central banks will be eager to roll out even bigger stimulus programs when the next crisis hits. Lacalle said economists “need to start looking at these programs and monitoring their results, not just adding another zero to the next stimulus program and hoping for the best.”

This is yet more proof that you cannot print and spend your way to prosperity. The lesson is that artificially bloating GDP and inflation always hurts the economy in the long run, especially the middle classes, who suffer more the loss of purchasing power and the difficulty to save.”