US retail sales grew by 1% in May, following the distribution of $57 billion in economic stimulus checks, reports CNN.

“The economic stimulus package is flawed policy in the first place”, says MoneyWeek magazine’s Richard Benson.

The US government hopes to revive its ailing economy with tax rebates. But with the cost of living soaring and consumers deep in debt, this will have little effect.
There is a mountain of consumer debt out there, and debt collectors are hoping for a big chunk, if not all, of that little rebate check. For every check issued, there are 10 or more people holding their hand out for it. This year you will get butchered at the butcher shop because of the price of beef, and burned at the bakery. Grain is so expensive, even the French middle class can’t afford a baguette any more.

For the average American, this rebate check represents only one car, credit card, or partial mortgage payment. When you consider it cost well over $60 now to fill up the gas tank for a mid-sized car, and a lot more to go out to eat, it won’t go very far.

On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

“The good news is that the Federal government is sending a little tax-free money back to us in the form of stimulus checks. Never look a gift horse in the mouth, especially when it’s coming from the horse thief who stole it from you,” says Gary North of the Daily Reckoning.

The bad news is that this money will be borrowed. Every penny will be added to the on-budget debt of the United States government.

What is the estimated deficit today for fiscal 2008? This figure is buried in the recently released report, “The Cyclically Adjusted and Standardized Budget Estimates” (April 2008). The figure is $361 billion. A year ago, it was $162 billion Next year, the CBO estimates, the deficit will be a mere $133 billion. Write that figure down in your diary of accounting illusions. (The phrase “Arthur Andersen” comes to mind.)

On March 12, the Treasury made its estimate: $410 billion. This was the same as in February. These are large figures. We are only in the early stage of a recession. It has barely begun to raise the unemployment rate. Yet consumer confidence is at the lowest level since the recession of 1982 (Reuters/University of Michigan Surveys of Consumers). Recall that 1982 was the year of the low point of the Dow: 777 (August).

Today’s loss of confidence has not yet affected the stock market significantly. Optimism still reigns among most stock market investors.

As the deficit soars, which it will, the government will absorb more resources that would have gone into the private sector.  In a recession, investors seek safety. They want to protect themselves against falling stocks and bankrupt corporations. They buy Federal government-issued debt on the assumption that the Federal government will not default in a recession. This money does not go to fund private capital.

This is bad for the economy but good — in the short run — for investors