The Economic Recovery that Never Was

Economics / US Economy
Feb 25, 2011 - 11:00 AM

By: Andy_Sutton

It is my belief that as the headlines continue to roll in about fiscal woes from sea to shining sea that we are going to get a full appreciation for the fraud that has been perpetrated on the American people in the form of the ‘economic recovery’ that the media has been stumping for since the middle of 2009. This ‘wag the dog’ type undertaking has been about confidence, perceptions, and little else. Absolutely, there are pockets of the nation where people have found work. After all, when your government dumps nearly a trillion dollars into the economy it is going to have SOME effect. Our goal from the beginning of these hyperstimulation maneuvers was to point out the unsustainability of this course of action and more importantly to predict the consequences thereof.

Is .4% really that big of a deal?

This morning, the Commerce Department revised its GDP estimate for the fourth quarter of 2010 by .4% to the downside. That in and of itself is certainly not newsworthy, but the reasons given for the downward revision most certainly are. For the first time in quite a while, the government and the media are actually allowing the light of truth to shine into government reporting. One of the biggest reasons (which has been included in many headlines) is that cuts in state government spending are largely responsible for the cut in GDP. So what, that is common sense isn’t it? It will be, but let’s analyze. I’ve talked many times about how GDP numbers have been overstated because they included government spending that comes from borrowed money. While those discussions generally focused on the federal government, this includes the states too. The states issue debt in the form of general obligation and specific bonds to do much of their spending since they, like the federal government, are largely insolvent. This spent borrowed money counts in GDP the same as a dollar spent that had been kept in savings. The thesis proposed months ago was a simple one; the states are going into extremis and when they do, down goes GDP. Double that for the federal government.

This is one of the biggest reasons that no one in Washington really wants to cut government spending, putting the rhetoric aside. They all know that if they were to cut a trillion dollars from the federal budget that GDP would fall by around 1/14th and we’d have an instant depression. Yet at the same time, a trillion dollar cut in spending is exactly what needs to happen along with a bevy of program reforms; and that is just for starters. Hopefully this gives you a better appreciation of the predicament we’re in as a nation. This is one of the reasons I think politicians are taking up the stance that they agree cuts need to be made, but can’t agree on which ones. This will give them all political cover to maintain the status quo thereby cutting essentially nothing, while making much in the way of fanfare over insignificant token cuts. The idea of shutting down the government and its massive entitlement system has already been floated to scare people into pressuring their leaders into maintaining the status quo. Stay tuned; it gets better.

Chaste Consumers?

Consumers also did not escape blame for the lack of more vigorous ‘growth’. Spending had originally been thought to have increased at a 4.4% annualized rate. It turns out spending likely only increased at 4.1%. Bad consumers! From our good friend Jeannine at AP:

“Consumers spent a little less than first thought. Their spending rose at a rate of 4.1 percent, slightly smaller than the initial estimate of 4.4 percent. Still, it was the best showing since 2006. And it suggests Americans will play a larger role this year in helping the economy grow, especially with more money from a Social Security tax cut.â€