We now are witnessing a struggle between two new factions that some might call the “Stimulators” and the “Austerians.” Both seem warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending too little and the Austerians warn that the true danger lies in spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austerians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness “The Maestro” belatedly returning to the hard-money positions that characterized his earlier years.)

In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, UK, Japan, Italy, et al.) to rein in their budget deficits, a strategy dubbed “austerity” by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.

Meanwhile, in several articles for his New York Times column, including one recently, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a “crazy” fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more – no matter how much debt results. Absent this, he claims, millions of workers “will never work again.” Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.

Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.

Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read the book: How an Economy Grows and Why It Crashes]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or “invested” in projects that may be politically advantageous but economically useless.

Any money spent by governments is not available to the private sector to invest. The Stimulators don’t make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating “demand” by any means necessary is the only goal they can see.

What really grows an economy is not more demand, but more supply. The Austerian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar – not only against gold, but other fiat currencies, including the pound and the euro – the markets are coming to the same conclusion.

As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.

If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.

My guess is that before the end of Obama’s first term, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austerians, as the world witnesses its greatest power careen into an inflationary depression.

This video provides an interesting and insightful view on why people are so concerned with the spending plans of the Obama administration. Granted, the video does not account for projected repayments of TARP funds, which we have already seen the start of, but it does provide a good reason to be concerned and give real thought to how much we need to spend some of this money.

Feel free to leave your comments.

“We didn’t want to make a huge formal communication out of this pricing change, because we weren’t really adding any fees, and we were hoping it would be a more useful experience for people…” Charlotte Hill, PayPal’s PR manager said.

That is completely inexcusable. When Paypal, or any company, makes a decision that is going to cost its customers money, the first thing they need to do is communicate this to those customers. I’m not sure how Paypal thinks taking more money from its customers equates to a more useful experience either. I get payments via Paypal from my clients every month and Paypal always takes a chunk for themselves. I think they need to be charging people who send money via Paypal, not those who receive it. Paypal gets a good $50 or so a month in fees from me each month, fees that come from money I’ve earned.

Yes, I know it states in the User Agreement that they reserve the right to make changes without notifying the customer, but for them to actually do so seems very sleazy to me. In rough economic times the last thing a small business owner needs is higher taxes from PayPal.

How do you feel about PayPal’s fee structure? Do you think its fair or not? Please leave a comment with your thoughts!

So what do you think of the current economic crisis? Leave a comment below and let us know what you think, and whether or not you feel we are on the right track as a nation.

Now, what you need to know is that this money is a loan… It is an interest free loan being extended to new home owners who purchased their homes in 2008, and will also be extended to those who buy a home in 2009. The loan is interest free, and is paid back over the course of 15 years. So the $7,500 you get back from the IRS will be paid back at a rate of $500 per year for 15 years.

This is a great opportunity if you spend the money wisely. You can use it to pay down debt (especially high interest credit cards), or you can use it to renovate your home. You can even just put it in a savings account or better yet, max out an IRA where your interest free loan will EARN interest FOR YOU! And that’s like getting free money.

In my opinion the smartest choice is always to pay off any credit card debt you may have. That alone will create huge savings for you.

Finally, there is one more catch about this year’s new program… If you sell your home before 15 years, you will have to pay the remaining balance in one lump sum. Which hopefully, will be easy to do if you are selling your home. Either way, this is a great opportunity for the wise investor and is well worth the time to look further into it.

Take Pride In Being Financially Different!

Recently, I ran across an article called the 5 Steps to Early Retirement. Written by a couple who retired at 38, here are they are:

1. Track your spending.
2. Save a lot.
3. Invest wisely.
4. Put peer pressure into perspective.
5. Keep your eye on the prize.

At first glance, these steps may seem obvious and common sense. However, I would say there is a lot of hidden wisdom in the 4th step, in which they explain:

Social pressure to spend can be subtle and pervasive, and it can divert you from your commitment to retire early. Marketing specialists tell you that if you only buy this new product, car, house, or membership, your lifestyle will improve. It’s reasonably easy to tune out that marketing message, but you have to handle your friends with a little more tact. Trying to match the spending of our peer group is a surefire way to derail financial goals. Decide now that you don’t have to keep up with their consumption to fit into the crowd. The choice is yours — not theirs.

In other words, if you want to be different from everyone else – have more savings, retire earlier, whatever – then you have to act differently from everyone else. Here’s a quick anecdote. A friend of my wife recently told her:

“You make good money, you should stop buying your dresses from Target… Check out my new Louis Vuitton purse!”

The same friend later in the same week said:

“How the *%& do you have $100,000 (20% down) saved up already for a house?”

She didn’t make any connection between the two events. I’m not saying everyone should buy dresses from Target, but I do think everyone should pick their battles and be proud of them. Maybe it’s not leasing that shiny SUV or brown-bagging the lunch more often. Maybe I’m weird, but I love it when people judge me by my outward appearance. One day, perhaps that same friend will say:

“What!? You’re only 48 and you’re retiring?”