So, following last weeks column, let us continue to examine what the future holds.
We are now planning on spending around $2 trillion (or 1/12th of our GDP over 2 years) as government stimulus or other miscellaneous spending over the next two years. Some economists believe it will stimulate the economy, but most think that at most you will get a 1:1 spending ratio…which by definition is not stimulative.
The Obama administration is calculating that they will get a 1:3 bump stimulus for every dollar they spend. That is ridiculous. But let us take half that, 1:1.5, which is at least a plausible outcome. That would mean the government would stimluate $2 trillion, and that would produce an extra $1 trillion in economic growth from other sectors. Great.
Now, what happens when the government stimulus dries up?
Many economists are now wondering if the Obama stimulus plan will give a short term boost to the economy, but nothing more. Since the ‘stimulus’ had less real stimulative spending than initially proposed, much of the spending (two-thirds, in fact) is spent after 2010. So therefore, spending on government programs must decrease, because the President has now promised to decrease the budget deficit by 2013; both promises cannot be upheld. So what results? Possibly what economists are terming a ‘double-dip’ recession.
“The stuttering attempts to repair the banking and lending mechanisms so far by the new administration suggests that by late 2010, the specter of a second dip into recession will be looming large,” said Merrill Lynch economist Sheryl King.
So what has happened? In essence, the government has been forced to take the place of the securitization market. Thus all those bad loans we hear about? Now the taxpayer is basically funding them. So what, you may ask? Well, it does have repercussions. The Fed’s own lending data shows that efforts to get money flowing again were having limited effect on the broader economy. Confidence has fallen so sharply that even those who can get credit are reluctant to borrow and spend. But it is even worse than that. Private industries that have been propped up by the government will some how have to be weaned off the government dole…because they now have no other sources of capital.
“Major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests,” investor Warren Buffett wrote in his annual letter to shareholders. “Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
Additionally, we talk about deleveraging. Do you realize that the U.S. Goverment is now the biggest leveraged entity in the world, by far?
Even Democrats are pushing back against the Obama plan. At least 40 Congressman have stated their opposition to the bill. And Senators Russ Feingold and Evan Bayh have both come out strongly that the budget must be much more restrained, especially regarding earmarks. Senator Max Baucus has asked whether the Obama budget projections are realistic at all. Many of these politicians supported Obama because they thought he was a moderate; it appears that Obama has pulled the classic bait-and-switch on them. How much they will stand up to their own president remains to be seen.
Democrats standing up for fiscal responsibility? Will wonders never cease.