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Much as Barack Obama heralds in a new age and is set to give us a great TV inauguration song and dance show, expect his economic stimulus plan to fail. This is the opinion if Philip Copeman, project leader of The TurboCASH Accounting Project. “I have held the position, since the start of the crisis, that there is no short term solution to the current economic problem. Until we can get eastern consumers buying western goods at western prices, the rest of the economics game is just musical chairs. Big business can no longer cut it. Small business and creative destruction in western economies and a matching upturn in eastern consumers, offer us the only sustainable way to deliver innovation and reverse the terms of trade. “ says Copeman.

I feel for leaders like Gordon Brown and Obama. In a Depression, it is tough playing the good guy. In Obama’s case he can rightly argue that he had no part in the creation of the problem and is merely saddled with the hero  role of international savior. It doesn’t help now for the savior to now admit that We can’t – We Can’t. However this is the likely grim reality.

The bubble has popped big time. To quote Jim Rogers “This is the first time – this is the worst credit bubble we've ever had in American history. No – never in American history have people been able to buy a house with no money down, never. That’s never happened anytime in the world. So, we have the worst credit bubble. It’s going to take a long time to work its way out. You don't cure a bubble in five or six months... It takes five or six years."

Bill Bonner of Fleet Street Daily describes “This is not just a problem for the US; it’s a problem for much of the world. Americans were the world’s consumers. They could be counted on to spend money – even when they didn’t have any money to spend. They bought the gadgets made by the Chinese, the wine made the Chileans, and the automobiles made by the Japanese. They were the chumps of last resort for the entire planet. Now that American consumers are coming to their senses, the whole world economy is feeling a little ill. “

As I predicted in November, the original $700 Bn bailout can be seen to have failed. Banks took the money and ran. So shall it be with Obamas new bailout package. To understand why this will happen we need to understand that we have entered the 21^st century version of the Keynesian liquidity trap. In summary what Obama is putting on the table is a proposal to lift the US deficit anywhere from the $800 Million that it is now to $1.5 Trillion Plus. The idea being to correct the unfortunate market reaction that the banks would not pass on the loans advanced in the bailout. The new plan is a legislated effort to drive the cashflow lower down into the economy. Why is this also set to fail?

For those of us familiar with Double Entry accounting. Every stimulus has to have a contra entry. The entries are Debit Private Bank Debt, Credit National Debt. Just a cahnge in the nature of the debt, no real change in the real world. The problem still remains. It matters not that much exactly who inside the dollar regime owes the money, Western debt is too high and continued unbalanced consumption merely aggravates the uneasiness. Shuffling debt is what we have been doing intensely in the recent past, instead of Lehman brothers and Barclays packaging it, we now have Obama and Brown giving the Powerpoint presentations. Markets have a way of doing what they want and not what you tell them to do. What is likely to happen here is that those lucky enough to receive bailouts will simply redeposit it with the larger banks, changing one debt type for another and return us to square one of the liquidity trap. All this will take us about another 6 months before we realize that this too will not have worked. Expect an even more interesting State of the Union day address round about July from Obama.

All the well made plans of the current government leaders, are simply one way of swapping one kind of debt for another. We are simply trying to take away debt from misbehaving large corporations and transferring this onto the Government – or the tax payers – or to be precise back onto the people who work at the misbehaving large corporations. See what I mean by the musical chairs?

The guys wearing the Armani suits and TV makeup are so busy worrying about their ratings and looking busy, that they have misinterpreted that the problem lies 20 000 Kms away on the other side of the planet. No kidding - we would do better to take off the fancy sunglasses (made in China) and spend the bailout money stimulating demand in the only real place that it is going to count – in the crowded suburbs of Japan and the villages of China. To understand what is happened you need to look past the financial shenanigans and back to the simple Johny-behind-the-counter-trading-store. Without disparaging half the human race, you can effectively follow the global economy by looking at just 4 countries, the US and the UK, which sells US debt to the rest of the world and China and Japan who supplies China the capital of production. What we have had happening for the past 20 years and accelerated over the past 8 years is Japan and then China running massive current account surpluses. Johnny Chang is selling goods and the customers are not paying their accounts. Selling their goods to the US and UK and its customers at prices that make western competitive efforts look paltry.

But its all just financial tricks. The eastern giants take the ill gotten gains of their undervalued exports and use the profits to buy Dollars, which has the effect of holding the Dollar artificially high. Now any student of macroeconomics 101, gets taught Riccardo’s theory of trade. If you run a surplus, your currency appreciates and your goods become expensive, imports become cheap and the natural laws of economics tilt into place and equilibrium is restored. None of this for the central planners of the east, screw 200 years for capitalist thinking, where the main priority is to keep the workers firmly at the grind. The Japanese no longer even have this as an option they have now raised their national debt to level where it is massive compared to their surplus. Sooner or later this had to break.

The bubble popping leaves everyone devastated. In China factories are standing still and the air is clearing. In Japan the outlook is even more grim. If you are a follower of Samuelsons Oscillator theory, industries involved in the investment multiplier are doubly shocked. Japan has been buyng dollars frantically for years trying to keep up the strength of the dollar. In 2003 Japan replaced  the US with China as its biggest customer, supplying them the machinery needed to run production. As factories slow orders for manufacturing robots grind to an absolute halt. 

The rest of us from Arab Oil states to African small farmers are just pawns in the game. With our currencies artificially high, we can only goggle and marvel and the wonder of eastern production. Instead we should acknowlege the way the Eastern economies have duped us.  We are like the North American Indians selling Manthattan. We buy their beads and our children will work to repay the debt.

There is a silver lining. If you have a small small business that can create and deliver some service or product, in particularly one with an international market, hold fast. If you can export your goods to the Eastern Economies you are set to become a working class hero - and thats something to be. You may be feeling a little exposed right now, but the light will shine soon. For our popularity crazed leaders, the macro-monetary solutions provide a distraction that is beleived at the moment, so expect then to play it out. However soon the time will come when exhausted, they will bring their futile, sweat filled suits to your place for a $ 20 dry cleaning. Maybe then - they will see that you are the gold nuggets of the economic future.