Nobody would ever dispute that the U.S. economy has managed to see its government spend its way into some sort of statistical recovery — though it is more evident in the output and sales data than in the income data. Look at the largesse — a 0% policy rate, a $2.3 trillion Fed balance sheet loaded up with mortgages, a $1.4 trillion fiscal deficit loaded with bailouts and freebies and accounting changes that have allowed the banks to mark-to-model their way back towards earnings heaven. If the economy was not recovering without Uncle Sam’s generosity, then that would truly be a big story.

But Mr. Market at some point will have to confront the future. The time gap between recessions is shortening now — we went 10 years from 1990 to 2000, then 5 years from 2002 to 2007 and the next recession, following this pattern, is likely going to occur within the next 2-3 years. And, unlike the start of the last recession when the government had so many arrows in its quiver, there are none today to help lift the economy again.

Going into the 2007 downturn, the budget deficit was $160 billion. There was ample room for fiscal stimulus. The funds rate was 5.5% and could be cut 550bps — now it is at 0%. The Fed’s balance sheet could be allowed to triple without reviving inflation expectations — good luck the next time around.

Read it all.

Filed under: * Culture-Watch • History • * Economics, Politics • Economy • The Credit Freeze Crisis of Fall 2008/The Recession of 2007-- • The U.S. Government • Budget • Federal Reserve

1. Daniel wrote: Nobody would ever dispute that the U.S. economy has managed to see its government spend its way into some sort of statistical recovery Well, wrong you are David Rosenberg, according to the most recent survey of the National Association for Business Economics.  CNN version of the story is at http://money.cnn.com/2010/04/26/news/economy/NABE_survey/. April 28, 12:39 am | [comment link]

2. Hakkatan wrote: It is impossible to create a perpetual “boom” time, which is what many people think is “normal.”  Three are many tricks that can be played and various ways of looking at things to help one see what one wants, and while no one really understands the laws of economics, the reality is that no matter what, one needs to work hard, spend thoughtfully, and spend less than one earns over the long haul, or disaster will come - even though it may be delayed for a time. April 28, 9:16 am | [comment link]

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