The Recovery Was Too Expensive

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by: Chris Martenson

Now that Bernanke is taking victory laps for electro-shocking the economy back into an upright position, inquiring minds want to know what this statistical recovery has cost us.

The concern here is that a few hundreds of billions in temporary growth have been achieved at the cost of several trillions of dollars of stimulus and thin-air bailout money.

The calculations and the implications are explored below. Here are the quotes around which this piece was written:

Fed Chief Says Recession Is ‘Very Likely Over’

WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that it was “very likely” that the recession had ended although he cautioned that it would be many months before unemployment rates would drop significantly.

From a technical perspective, the recession is very likely over at this point,” he said, adding that “it’s still going to feel like a very weak economy for some time, as many people will still find that their job security and their employment status is not what they wish it was.”

What he means by this is that the myriad statistical shucks and jives applied to the economic body will come up with something that the government will gladly call "growth" but which many people, notably those living off of paychecks, will be hard pressed to detect in their daily lives.

The US is now in a managed recession. While the government and Federal Reserve now have a firmer grip on the matter than they did a year ago, this management assures two things; a very poor use and allocation of resources (along with the usual amounts of fraud and self-dealing) and an increase in the downstream risks we face.

Where we faced a pretty dramatic set of events associated with the probable (and necessary) implosion of big chunks of an entirely too bloated and redundant financial system, our fiscal and monetary authorities have willingly risked the US's solid credit rating for a temporary reprieve from economic pain.

Essentially we traded a rapid return to growth (at any cost) for an increased chance of a future monetary crisis. There are others who share this view, such as William White the former chief economist at the BIS who worries that past problems have been traded for future imbalances that are larger than what they replaced.

Of course, "growth" achieved at the expense of going further into debt is not really growth at all.

Here's what I mean by that. Suppose that your salary had been cut and you called this decline in income your personal 'recession.' If you borrowed money to make up the difference, would you say that your income had 'grown'? Probably not, but the statistical wizards down at the BLS certainly would. They do not factor out the impact of debt when measuring this thing they call growth.

I think that it is important that we ask ourselves, "okay, how much did we borrow and how much 'growth' happened as a result?"

For the sake of argument, let's assume that the economy will grow by 3% this quarter and 3% next quarter. On a roughly $14 trillion economy that pencils out to a $420 billion yearly rate of increase in the economy.

And how much did it cost us to force this return to growth?

It came at the expense of a nearly 20% expansion in the total expenditures of the federal government. If it were only this $512 billion increase in outlays, we might be tempted to think we got a good deal.

But, between here and the end of the calendar year, another few hundred billion in deficit spending will occur. So let's call just the increase in deficit spending alone an $800 billion dollar hit to the bar tab .

If that were all, we might still be tempted to call this a bargain. But at the same time that outlays were increasing, revenues were plummeting. As we see below, there was a more than 16% drop-off in federal receipts amounting to a shortfall of some $365 billion which we must add to the tab.

Now the price of our $420 billion in economic 'recovery' is over a trillion dollars. In fact, if we wish to just take the increase in federal debt this year, we might peg the price tag at $1.668 trillion federal dollars:

click to enlarge

Click to enlarge

Is a $420 billion yearly increase in GDP worth a four-fold higher increase in federal debt? Before we answer that, let's look at how much the Federal Reserve has poured into the furnace.

Off the Books Exposures

This $1.668 trillion (so far) increase in federal debt is just the tip of the iceberg. Lurking beneath the waves are the implicit and explicit guarantees of several trillions of dollars worth of bank debt, Fannie and Freddie bonds and mortgage backed securities, FHA mortgages, and whatever has been promised to the Chinese (et al.) behind closed doors to keep them from fleeing the scene.

The total of all the off-the-books stimulus and various guarantees stands at more than $3 trillion right now.

The Federal Reserve

Of course, the federal government has not been operating alone. The Federal Reserve has printed an unprecedented amount of money out of thin air which it has used to buy a lot of "assets" of questionable worth from stricken financial institutions.

As we can see below, another $1.2 trillion in 'funny money' needs to be taken into account when we are assessing the true cost of our economic 'recovery.'

Click to enlarge


However, the chart above merely shows the amount of actual cash injected so far and leaves out the additional $5 trillion in other program commitments that the Fed has either promised or made.

Adding it all up

In direct stimulus or bailout money roughly $2.8 trillion has been spent so far which has translated into the possible $420 billion in yearly economic expansion. A further $8 trillion has been either made available or committed to be used if necessary. $11 trillion exchanged for $0.42 trillion.

Does this sound like a good deal to you?

While it's easy to play Monday morning quarterback, I am reasonably certain that if you gave me $2.8 trillion in cash and another $8 trillion in guarantees that I could have achieved a lot more than $420 billion of temporary incremental economic activity.

Of course, I wouldn't have poured a single dime of that money into any of the black holes masquerading as banks that are now, regrettably, even larger than too-big-to-fail. Instead I would have poured the money into farms, communities, new forms of transportation, energy infrastructure and the like.

Unwinding the mess

As I recently wrote, the notion of how to unwind all of the Federal Reserve thin-air money injections, plus reducing and then finally removing the federal government deficit spending from the economy is going to be a tricky matter indeed.

The NYT article continues:

Mr. Bernanke said the consensus of forecasters was for moderate growth for the rest of this year and next, particularly as credit markets thaw, consumer confidence takes time to heal, and the federal government begins to unwind a series of federal spending and lending programs intended to mend the economy.

For policy makers in Washington the more significant question than the actual date of the end of the recession will be when to begin unwinding the myriad of lending programs that were hastily created in response to the crisis.

(Same NYT source as above)

Even as economists in the US are beginning the long process of figuring out exactly how they are going to unwind the mess, there is another framework for understanding out there that suggests that their efforts are doomed to failure even before they begin.

For this story, we turn to an excellent article in the Boston Globe about Hyman Minsky, the economist who got it right, decades ago, and was completely ignored by the majority until very recently.

Why capitalism fails

Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place.

The notion here is that all of the rescue efforts so far, as well meaning and as clever as they may have been, amount to little more than lurching back up the cliff over which we just recently lurched.


The US, and most of the rest of the world, is now rejoicing the end of the recession. Growth has been forced upon the system.

However, this growth comes at an enormous cost in terms of borrowed and dedicated funds and only now are the early questions being asked about how to recall all of these extravagant gifts from the parties to whom they've been given.

We've achieved some very temporary economic growth amounting to perhaps $420 billion at the expense of $2,800 billion spent and another $8,000 billion committed.

Instead of using the crisis to ask some hard questions about the stability and sustainability of the prior system - and using the answers to make some quite obvious changes - the entire crisis seems to have offered little in the way of insight to those in charge.

As the prior stimulus and gifts are unwound from the system, a massive headwind to growth will result. The alternative is a massive tailwind of inflation, the early signs of which we might already be seeing in our commodity and equity markets.

Both could have been avoided by recognizing that we were on an unsustainable path and allowing the unnecessary elements to die a dignified death. Certainly we would have lost an unneeded proportion of our financial machinery - and the attendant campaign contributions - but that would have ultimately proved to be to our long-term benefit.

Instead we are left with an unchastened financial industry already back to slinging great globs of risk and surreal bonuses about as if nothing had ever happened at all.

And we are left with the discomforting notion, known well seemingly everywhere but in the public centers of power, that perhaps we have given up too much to obtain so little.

It recalls a quote by Benjamin Franklin which we might paraphrase into, “They who would give up future prosperity for temporary economic growth, deserve neither prosperity nor growth.”

Disclosure: No positions