Guest Post: Is the Recovery "Self-Sustaining"? Here's A Test

by Tyler Durden
03/22/2011 11:00 -0400
179 comments
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Submitted by Charles Hugh Smith from Of Two Minds

Is the Recovery "Self-Sustaining"? Here's a Test

Here's a simple test of whether the economic recovery is self-sustaining or not: cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing.

Federal Reserve Chairman Ben Bernanke has suggested the economic recovery is almost "self-sustaining," meaning it is no longer totally dependent on Federal stimulus and unprecedented Fed intervention for its "growth."

The key idea here is simple: all the extraordinary stimulus spending, all the bailouts and all Fed programs--buying up $1 trillion in questionable mortgages, $600 billion in quantititative easing purchases of Treasury bonds, and so on--was all necessary to "get the economy through this rough patch." At some magical point we are now approaching (or so we are reassured), the private (non-government) economy will start growing organically, meaning that non-State economic activity will generate a virtuous cycle of economic growth that fuels future growth.

The alternative vision is a bit more bleak. In this view, all the Federal Government and Fed spending and intervention have accomplished is encourage the culture of "extend and pretend" and "free money," and raised the vulnerability of the Status Quo to exceptionally dangerous heights.

In other words, from this height, there can be no "soft landing" when the asset bubbles and stupendous Federal borrowing both collapse.

Here's a simple test of whether the economic recovery is self-sustaining or not: cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing. If the economy is self-sustaining, it will move forward without Federal spending and Fed intervention.

If "self-sustaining" is a fiction, an illusion, a mere figment of propaganda deployed to enable the Status Quo to feast off the remaining productive elements of the U.S. economy, then the economy will absolutely crater.

Let's compare Federal spending in 2004, 2007 and 2010. Remarkably, the Federal government spends $1 trillion more a year now than it did a mere three years ago and $1.5 trillion more than it did a brief six years ago. Here are the numbers from the Office of Management and Budget website::

revenues

2004 $1.88 trillion
2007 $2.56 trillion
2010 $2.16 trillion

spending

2004 $2.29 trillion
2007 $2.72 trillion
2010 $3.72 trillion

deficit

2004 –$412 billion
2007 –$160 billion
2010 –$1.3 trillion

In three years, Federal spending jumped almost exactly $1 trillion, or 36.7%.

Here are the deficits of the past three years, and the estimated shortfalls for fiscal years 2011 and 2012:

2008: $458 billion
2009: $1.4 trillion
2010: $1.3 trillion
2011: $1.5 trillion (est.)
2012: $1.6 trillion (est.)

(CBO estimate for 2011)

total: $6.258 trillion in five years.

And this isn't even the real total being added to the national debt, as “supplemental appropriationsâ€