The gloom and doom theorists swarmed out of the woodwork during the 2008 financial meltdown in reaction to government actions taken to prevent the "great recession" from morphing into the next great depression.
The blame fell on both political parties. The Bush administration began the bailout efforts in March 2008 and by the time its term ended, it had provided $29 billion in loan guarantees to allow JPMorgan Chase (JPM) to take over collapsing Bear Stearns, the $178 billion "Average American Bailout" stimulus plan, the $300 billion Homeowners Bailout, the $200 billion bailout of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), the $25 billion Automakers Bailout, the $150 billion bailout of AIG (AIG), and the $700 billion Banks Bailout (TARP).
The actions continued when the Obama administration took over, with a $787 billion stimulus package, an additional $275 billion homeowners stimulus plan, an additional $30 billion in assistance to AIG, the $1 trillion "Toxic Asset" program for banks, and the $22 billion automaker loans in March 2009.
Oh, the disasters that would surely follow as a result of all that deficit spending.
First it was that not only was there no way the massive bailouts could halt the catastrophic worldwide financial meltdown, but in fact the huge increase in government debt would only accelerate the decline.
The bailouts would also destroy democracy and the free market system and turn the country into a socialist state, with the government being major investors in and lenders to auto companies and banks for decades to come, perhaps even being forced to nationalize them and run them as government entities like the Postal Service.
The low interest rates and easy money policies could not help but create massive spiraling inflation that would also bring the nation and the world down.
The Dow's 50% decline from 14,118 in 2007 to 6,516 in early 2009 was only the beginning. Under the gloom and doom conditions, the Dow couldn't help but plummet much further.
Four years after the "great recession" ended in 2009, and with the stock market back to its pre-crisis 2007 level, with the loans to automakers and banks fully paid back (with interest) and the Federal Reserve making billions in profits on the assets it had taken onto its balance sheet in the bailouts, the big-picture theorists were still warning that the disaster had only been delayed, that the record government debt load will sink the U.S., impoverishing not only the current generation but the next generation of tax-payers as well.
It made no impression on them to point out that President Reagan had used similar extreme spending and stimulus efforts to successfully pull the economy out of the disaster of the 1970s, resulting in then record government budget deficits and debt. The doom and gloom forecasts then were also that the nation would collapse under the debt load and be bankrupt within a few years. But once the stimulus efforts finally began to work, more people became employed, and the stock market began to rise again, the rapid increase in tax revenues had government budget deficits coming under control in the early 1990s. By the late 1990s the deficits had turned to surpluses, and the record government debt was being paid down with ease.
Is history repeating? So far, one at a time we've seen the doom and gloom fears drop by the wayside unfounded. The great recession ended and an economic recovery has been underway since mid-2009. The stock market has fully recovered and gone on to new highs. We've seen the loans to automakers and banks fully paid back (with interest), no continuing government support needed, the Federal Reserve making billions in profits on the assets it had taken onto its balance sheet in the bailouts. The fear of spiraling inflation did not materialize, and so on.
And now it looks like the fear that the record government debt load will be impossible to overcome and could still bring the country down, may also be fading away.
We saw early indications in the way state legislatures have already seen tax revenues increase dramatically as a result of the economic recovery, and create significant reversals of their previous frightening budget struggles, which had forced widespread cuts in public education and social services.
A recent report from the National Conference of State Legislatures says only a few states still face budget difficulties, while a growing number expect to finish 2013 with budget surpluses. The situation is creating new, but welcome, problems in states like Florida, Iowa, Michigan, Missouri, North Dakota, Ohio, Tennessee, Texas, West Virginia, and several others, where legislators now worry and argue about how to spend the surpluses.
And now it's beginning to show up in the Federal budget area.
The non-partisan Congressional Budget Office said in its new estimate issued Tuesday that the annual budget deficit will shrink to $642 billion this year, substantially better even than its last estimate just three months ago, of an $845 billion shortfall.
How significant is the now accelerating decline in the deficit since the peak at $1.4 trillion in 2009? That $1.4 trillion deficit in 2009 was 10.1% of GDP. Assuming no further revisions by the CBO, the now projected $642 billion deficit this year would be 4% of GDP.
Not that there isn't still a massive problem in the record level of the overall federal debt. The significant improvement in the annual budget deficits only means the debt is growing more slowly.
But the trend reversal is clearly in the right direction, following the same track as the reversal from the record debt and deficits in the 1980s that surprised everyone with how quickly the deficits became surpluses once that anemic economic recovery gained strength.
It does have the last of the 2008-2009 doom and gloom scenarios beginning to also fade away.