What the U.S. economy will look like in 10 years is anyone's guess, however, it is fair to say that if Obama, in addition to being president, also moonlighted as commissioner of the MLB, then Jose Canseco, Barry Bonds, Mark McGwire and A-Rod would not only be swinging all day, but also juicing up on their bathroom breaks and twice on Sunday. Obama's fascination with the steroidal rejuvenation of the U.S. economy is astounding, however supply and demand is a little different than swinging a corked baseball bat. The example Obama is setting for the young generation is that it is ok to overspend on everything (especially if some pork barrels can be snuck along), so spend away, max out your credit cards, and whatever will be will be (if you are lucky you may just borrow enough to become too big to fail).
Where do we stand?
In past recessions, the corporate sector, the consumer and the economy were given the benefit of low real interest rates, some accelerated depreciation tax credits for capital equipment, on occasion some personal tax cuts, but that's about it. The economy was left to respond to these incentives, and when you saw things like consumer spending, housing and inventories start to move, you knew the recession was ending. It was time to get back to investing, since the economy was functioning on its own again. As seen in the chart, most recessions get the benefit of 300-450 bps of Fed easing (size of bubble), but the expansion in the monetary base is modest (10%-20%, y axis), and the fiscal expansion (x axis) is not that much, or even zero.
But this time, public sector stimulus to combat the recession is off the charts (literally). You get the same Fed easing, but its combined with an expansion in the monetary base of over 200% and a 20% increase in the US treasury debt/GDP ratio (this is a conservative estimate that will probably go much higher). This is something we have not seen in the last 70 years. Of course growth, spending and housing will start to look better; with this level of steroid injection, it would be almost impossible if they didn't. What I am struggling with is the cost of the program below. Maybe they are long-term costs (inflation, crowding out of private sector investment, permanently higher savings rates, the $, lack of confidence, lower productivity, etc), some may not happen, and maybe its way too premature to think about them now. But its amazing how crowded the bearish view is.
hat tip reader Michael.
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