It's Just That Easy?

The bullish case is predicated to some extent upon the unprecedented amount of stimulus being injected into the system (what I call an artificial impost). I am presuming that the case also extrapolates to a point in time where the stimulus puts us on a self-sustaining track where the govt can hand the economy back to the private sector (but I haven't heard that espoused too much).

I've struggled with the seemingly cavalier way in which some analysts and strategists take it as granted that the borrowing of money is an unmitigated positive. My sense is that they see it this way because the immediate cause is positive and the long term effects somewhere in the future. Similarly, they see it this way because they have been conditioned to this cause/effect throughout their careers. When a problem arose in the past, we simply doused it in money (whether fiscal or monetary, or preferably both), and voila the problem was solved.

If it were only that easy. Something seems wrong about this to me. But I'm not smart enough to fully articulate why. I guess the best response I can make is if it were so simple to goose growth by simply spending and borrowing money, then why don't we do this all the time. If there are no costs/consequences to such an action, why not do it always and at every time. The answer, of course, is that there are limits to such activities.

However, as John Mauldin said last week, saying "this time is different" is a very precarious position to take, and will generally be wrong (except when it is right...wasn't last year a "this time is different" case and didn't all the lemmings fall off the cliff together).

Increasing deficits when the balance sheet is already stretched and the income statement looks terrible (just ask the states and local governments) does not seem like a free lunch to me. The economic optimists seem to be only focusing on the positives (stimulating demand), while failing to factor in the effects (greater debt burden, greater pressure on currency/inflation, a short term fillip, rising taxes).

Is the market that dumb that we can pull the wool over its eyes by simply creating money? I don't think so. So there is something else to the markets strong rise. Me thinks it was the simple overshoot of the market in Feb/March in the face of great fear and uncertainty. But with the armageddon factor diminished, we now have to work out what is a reasonable valuation given the fundamental outlook...and that is where it gets interesting.