The U.S. Is Spending Its Way Out of the Recession 32 comments
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The Federal Reserve has recently announced their balance sheets more than doubled in the past year. The surge reflects increased government spending to try and combat the Great Recession. That's hardly surprising. The US government has been consistently indicating its intention to spend, spend, spend. The economists might as well predict that the sun will come out tomorrow or that the the recession will end one day.
What most people don't understand is how government spending helps to soften the recession. Down to its simplistic core, the economy can be broken down to four things: consumer consumption, business spending, government spending, and exports to other countries. That's right! That's the expenditure measure of the economy:
GDP = C + I + G + NX
Consumer spending dropped dramatically because some people lost their homes, confidence, and their jobs. The declining consumer consumption was and currently is red ink for the economy. Business investments went down because of less business, so another red slash. Forget about the United States making some bank through exporting goods to other countries. The US hasn't fixed it trade deficit in 60 years.
That only leaves government spending as a remedy to soften the recession. That's why the government is loading up its balance sheet to help spur spending. The idea is that jacking up the G in the equation will help to offset the declining Consumption and Business Investments. With a slight benefit of hindsight, it's beginning to look like the increased government spending might be alleviating some of the recessionary problems.
For the investors, a good diversified portfolio should contain some bond holdings like TIPS (Treasury Inflation-Protected Securities). Increased government spending should put inflationary pressures on the dollar making TIPS worthwhile. The problem with TIPS is that the economy is going through a deflationary spiral and the return on TIPS are currently low. If the government continues to jack up the G, consider balancing your portfolio with TIPS.
For the gamblers, the increased government spending may soon translate into a recovering or flat economy and time to go long on the overall markets.
Disclosure: No Positions
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Stevielee: no, you should do what you need to do, keep looking and bring down expenses. But in economics, the advice offered in the aggregate is _not_ necessarily the advice offered to an individual, and to assume so is actually something of a fallacy.
(Gee, I wonder why the other three can't contribute much more?)
HEY! I AGREE! After all, they need their "hundreds of billions" of "dividends" every year - "cash flow, baby!" What Exxon wouldn't do to have even half-a-year like that?
Capitalist hero has it right in the long run. Government spending does "crowd out" a more efficient private sector and does major long-term damage. Does anyone believe that new government spending programs can quickly be ended once the deflationary depression risks are ended?
Richard offers the conventional rationale for Keynesian policy. It is true that neither consumers nor business are much inclined to spend and invest currently, thus providing the crisis opportunity that big-government Democrats are not inclined to waste.
But suppose the massive spending programs recently enacted had been replaced by massive tax cuts for business and consumers while at the same time interest rates were forced down so that both sectors could refinance their liabilities, the ratio of incomes to liabilities in the private sector would then be enhanced dramatically and the natural propensity of consumers to spend would bring the downward spiral to a halt. It would be much easier (at least in theory) to raise taxes once the economy has recovered than to eliminate entrenched government programs.
So how does the government spend money it doesn't have, and further, how does spending money you do not have, "soften the recession?" And what do you mean by "softening the recession?" Socialism? Speak in clear terms so people can understand you. Not like a Fed chairman. No wonder "most people don't understand."
Doug T......The mutual fund guy
www.mutualfundwealth.com/
My mother and father in law have the same program. Everytime rates go down they refinance their home mortgage to help pay off their new cars and all the other crap they don't need. So they add the costs of the refinance, car payments and credit cards to the loan and extend the length out again. Essentially lowering there monthly payments and getting nowhere but living a nice comfortable life.
We ( my wife and I) on the other hand own our house, a large piece of land that I farm and cars outright. We have cash on hand to invest and if the farming does not work out so well we will most likely be able to sell parts of the farm for house lots.
So I think I will do all right and I better because I will probably inherit a broken down house worth less than the money still owed on it. Just like future generations will inherit a broken down country.
Yeah just spend like there is no tomorrow and pass the debt off to the kids. People have to cut this crap out and the author of this article is just disgustingly irresponsible as is our government and so many in the world. Rant Over.
Rant over
Wouldn't that mean that because "G" is going like gangbusters right now that in the future "C" will get Squeezed and "G" will have less "Real Income"?
This implies a Very Long Time in a reduced state of prosperity.
Unless of course it is all "A Funny Money System" With No real Need For Populous Participation.
Short Sighted Solutions Skew The View.
Fixing a crisis caused by huge debt loads and spending money we don't have cannot be fixed by even larger debt loads and spending more money we don't have.
I love how "experts" sit in their very narrow little worlds and "see" reality for the rest of us.
Banks are using dirty tactics to force employers and consumers into bankruptcy and insolvency.
The government cannot "spend" our way out of that reality. This country was living on credit and now that is virtually gone.
50 year old businesses, who were just hanging on-thanks to off shoring-are now closing their doors forever. Laying off more Americans, bankrupting owners and devastating towns across American.
Yet "experts" speak of "softening" and "recovery" and "government & banks know best"
Thanks for your help in the upcoming major crisis the likes of which has never been seen on this scale before.
After all, the President (King?) and Finance Minister of Zimbabwe were quick to praise Obama and Congress' plan. Stated that they employed the same techniques to "fix" their economy.
Have you seen the value of their dollar? Coming soon to "long haul" investments near you.
But that is dwarfed by the amount of printing going on. TARP and quantitative easing and all that means we have had huge increases in the money supply that are likely to lead to serious inflation.
With inflation the government will be paying back in cheaper dollars so the debt won't be such a burden. Or it least it is heading that way.
The problem is that the inflation acts as a confiscatory tax on anyone who has accumulated savings in dollars. So get out of dollars and into real assets - gold, silver, commodities and so on are the way to hide from the coming inflation.
So many hedge funds and others talk about going to cash. It really appears to be almost worthless soon. I am investing in food production and gold. People always have got to eat and my 50$/lb organic tomatoes will probably sell like hotcakes because if people want they will be real juicy and perfect for throwing at politicians and bank execs! And if the tax collectors want my savings they are going to have to pick their own.
On Apr 24 07:29 PM bricki wrote:
> The writer here seriously confuses monetary and fiscal policy. Yes
> the government is spending too much, and taking on too much debt.
>
>
> But that is dwarfed by the amount of printing going on. TARP and
> quantitative easing and all that means we have had huge increases
> in the money supply that are likely to lead to serious inflation.
>
>
> With inflation the government will be paying back in cheaper dollars
> so the debt won't be such a burden. Or it least it is heading that
> way.
>
> The problem is that the inflation acts as a confiscatory tax on anyone
> who has accumulated savings in dollars. So get out of dollars and
> into real assets - gold, silver, commodities and so on are the way
> to hide from the coming inflation.
I am counting on them to save us all!!!!
I am just saving more than normal (10%), and nibbling on the
opportunities...........
On Apr 24 09:05 AM wdhalgren wrote:
> My family is following this policy on a personal level. Due to unforseeable
> circumstance, we are near bankruptcy. We haven't made a house payment
> on our new home in 9 months, but thankfully Fannie Mae is letting
> us live rent free at present. Our credit cards are maxed out and
> unfortunately we're behind on payments there too. I'm hoping Barney
> Frank can finally muzzle those greedy credit card companies so they'll
> leave me alone. Obviously I can't make the payments on my 2009 Ford,
> much less my wife's 2008 Lexus. I have no idea how we'll meet the
> kids private school tuition of 15K for next year. Retirement, college,
> health care, fuggedabout it.
>
> All of that was starting to get a little depressing, but I've been
> watching CNBC and reading about green shoots. Bernanke and Obama
> and Geithner say we're turning this thing around. They're investing
> in America and they want me to do my part. I can definitely see the
> logic, I mean if I quit spending just because I'm dead broke, how
> will everyone else make a living? My brother-in-law loaned me 5,000
> bucks to get us through this tough period. So, we've decided to take
> a long vacation to Vegas and blow it out. I think this is where we
> turn it all around. Wish me luck.
Even in a deflationary cycle there is spending.... spending less, but spending none the less. (Spending less on any given item; that is how you know it is deflationary). What really is 'crowded out' is corporate profit.... no profit; no taxes to pay. Just released....... first six months data.... corporate tax reciepts to the Treasury; down 57%.
YOU read that right.
Any more stupid comments????
On Apr 24 11:54 AM _richard_ wrote:
> Capitalist hero: no, Federal spending does not "crowd out" investment
> in a deflation, since there is no investment going on in a deflationary
> spiral. You do raise a good point: when the recovery eventually happens,
> spending should be reeled in, and that could be politically difficult.
> But that's a political, and not an economic, objection.
>
> Stevielee: no, you should do what you need to do, keep looking and
> bring down expenses. But in economics, the advice offered in the
> aggregate is _not_ necessarily the advice offered to an individual,
> and to assume so is actually something of a fallacy.
CapitalistHero wrote: Private money goes to projects that people are willing to invest their own money in, and therefore are much more likely to be profitable and by definition fulfill a need in the economy.
Not Necessarily
If there's one thing that this recession has shown us quite clearly it's that even when people are investing their own money they are still entirely capable of cranial-rectal inversion. The justification described by Keynes for government spending is that the government is motivated to spend money on things that the private sector has no motivation to pursue. Private interests aren't going to provide funds for your child's school district, although there are plenty of private funds in companies that will sell your child fast-food or video games. The government does its best to act in the public interest. Private ventures are more often products of greed and salesmanship.
Someone's willingness to invest their money in something should not be taken as a sign of investment quality-look at how many people took courses to get a real estate license over the course of the last ten years-by your logic real estate is the place to be and has been for some time. Remember the dot-com bubble? AIG was funded by private money also-look how wonderfully that turned out. Let's not forget Chrysler. It wasn't Iacocca and the government that tanked them for a second time-it was those brilliant marketing plans that had them pushing 400+ horsepower hemi powered sedans when gas was over $4.50 a gallon.
Admittedly, Keynes is a bit out-dated; Galbraith made a statement to the effect that: "No economist can be right forever, if he can just be mostly right in his own era he's doing about as well as anybody can." Keynes' logic was framed by his experiences working with the British government in the interim years between the two wars, and part of his earnest call for government intervention was as a reaction to the gross profiteering and mismanagement that he observed in the transition period after the first great war.