Summary: Many economists and pseudo-experts forecast not just the long-anticipated “v” recovery, but an acceleration of the current good news into a boom. Before we pop the corks, let’s look at the recovery, what the recovery cost us, and how we’ve spent this expensively bought time.
What happened in 2011?
1.8 million new jobs (from the current employment survey)
Increase in personal income of $576 billion
Increase in annual GDP of $965 billion
Cost of this recovery: $1,057 billion of new Federal debt
The recovery is real. Government spending sustains the economy while households pay down (or default) on their excess debt. The recovery is real, just like the recovery of a patient in a hospital’s intensive care ward. Wired and tubed, fluids flowing and machines humming, the patient feels fine.
What happens when we disconnect the patient? Code Blue! Immediate medical attention needed!
What happens if the US cuts spending to reduce the deficit? Code Blue! Instant recession.
Let’s look at the big picture
In 1929 – 1932 our leaders did everything wrong, since they had no reliable theory to guide them. In 2008-2009 we faced a similar situation but successfully applied costly lessons learned during the Great Depression. We passed that test. The second phase was more difficult, and we may have botched it.
(1) We borrowed and then squandered the money. We sustained consumption instead of using low rates and idle resources to rebuild our decaying infrastructure.
(2) The borrowed trillions bought time for reforms to our regulatory systems, especially on the banks, so that the problems that brought us down do not reoccur. We have squandered that opportunity. Now banks have recovered their political strength and remain above the law.
(3) The very success of the economic stabilization programs has had an unexpected result: without the pain of the depression we’ve not restructured our economy (China has the same problem). All the imbalances remain. So a recovery seems likely to again produce underinvestment by business, continued government deficits and trade deficits. Nor have we adequately reformed the health care system, the cost of which comprises the bulk of the government’s future liabilities.
What comes next?
The global economy has been decellerating since roughly last summer, but slowly. The current economic data looks too confused for any reliable forecast at this time. Almost anything might happen in 2012.