In 2008 a crisis a financial crisis began that lasted through 2009 and arguably into 2010. The President, Congress, the Treasury, and especially the Federal Reserve all worked together to stem the crisis. Together they took historic actions including TARP 1 and 2, TARF, passed various tax incentives, extended unemployment benefits numerous times, bailed out Chrysler, GM, the Freddie Mac and Fannie Mae, and major financial institutions, while pumping trillions into the economy by increasing the Federal Reserve's balance sheet through Treasury Bill purchases, lowered borrowing costs, and more. Most agree these actions stopped what would have been a collapse of the financial system and an all-out depression. In effect the crisis never became a disaster. The economy didn't go over the cliff.
Things look good now. Unemployment appears to be coming down. Corporations are reporting record profits and talking about hiring again. Consumer and business confidence is way up. Manufacturing is starting to grow. GDP growth is back and accelerating. The stock market is recovering and helping regain wealth. So while the real estate market is still in a depression, the broad economy seems like it's out of the woods. You think?
I believe we're on the cusp of a huge economic expansion, right after we solve one problem! The opportunities for economic growth around the world and in the USA are enormous. And, while a lot of people doubt America's ability to "make things" and create jobs, I believe there are tremendous reasons to believe in the good ole USA!! But there's just one problem, and I'm afraid it's a real big problem. A problem so gi-enormousness that it can derail the economic train before it gets up enough steam (momentum and mass) to take us to 5.5% unemployment.
As I said, the financial crisis was diverted before it became a disaster. But the problem is that the crisis was diverted from the "private sector" to the "public sector." While the private sector can feel pretty good about how things are going, the public sector is about to collapse. The problems from the private sector were swept under the rug of the public sector and now they are resurfacing. Only this time there is not another rug to sweep them under again!! Let's see what you think we'll do about it. Take a stab at my little multiple choice question:
Who's going to bail out the Federal Government and the States and Medicaid and Social Security and all the Pension Funds and all the agencies and entities that would not survive if not for their public funding?
a) Tax Payers - with MUCH higher taxes
b) Treasury - China keeps buying our added debt
c) Federal Reserve - with their printing presses
d) Drastic Cuts - massive reduction in government, programs, school budgets, safety & security, regulators, services, health care, defense, etc.
e) All the above
f) Other - dream on
The answer has to be "e) All the above." Problem solved, right? Wrong! The correct answer is "f) Other - dream on." Why do I say the right answer is wrong? Here's why in the same order:
a) Tax Payers - won't stand for MUCH higher taxes
b) Treasury - the world's sovereign debt markets and rating agencies would rein in our ability to borrow that much
c) Federal Reserve - markets and inflation would go nuts if the Federal Reserve (a.k.a. "Helicopter Ben") tried to print the amount needed to bail out everything that needs to be bailed out
d) Drastic Cuts - really? Do you really believe congress has the will to do what they've proven they can't do
e) All of the above - it ain't going to happen
f) Other - dream on!!!
So we continue to live in a dream world; the dream that things can keep going the way they are and that the big problems will somehow go away on their own. We're also dreaming if we think the economy can stay on its present positive course while the public sector comes apart at the seams.
Feb. 2011
