While Federal Finance Minister Lindsay Tanner says the latest retail sales figures[1] show the Government is taking the right steps to fight the economic downturn, the truth is probably the opposite. While I'm going to ignore the blatant issue with cause and effect (we have no idea based on the evidence alone whether the stimulus worked or didn't work. What if retail sales are up on some unrelated issue?), the downturn we're experiencing is a response to an artificially inflated economic structure, not a lack of consumption and spending.

Loose credit, courtesy of the Federal Reserve in the US and our own RBA, was lured into certain sectors and industries in an unsustainable way, known as malinvestment. The natural response is for failed businesses to sell off assets and allow the labour and capital currently held up in those industries to be reallocated.

Some real good news would be further declines in retail spending, which would perhaps indicate that consumers were taking on less debt. They might be saving more. They might be adjusting their time preferences and thinking about long-term plans rather than short-term wants. Unfortunately, it seems that the stimulus is serving its purpose: prolonging the downturn and the misallocation of capital so that the political muppets can claim a victory based on some government statistics.

All of the above (less debt, more savings) are pre-conditions for recovery. The sudden increase in retail sales is only good news if one adopts the crude theory that economies are sustained by consumer spending. Consumer spending is simply the 'reward' for the real foundations of growth: real savings and investment. I find it highly unlikely this recent jump in retail sales are a result of an improvement of those foundations; the more likely answer is that it was caused by further capital destruction for short-term gains.

[1] Source: Sales surge 'shows stimulus success', ABC Australia, 06/05/2009