Why We NEED a DEEP Recession
Anyone who believes our economy will take off without a severe recession, is fooling themselves. And yes, I'm including all the famous economists who foolishly believe there are methods to avoid a deep recession. Here's the current situation - the FED and the gov't are going to spend lavishly and print money to try and keep this recession from getting any worse. There are three possible outcomes:
1) Print/spend too little. This will cause the situation to get worse (unemployment, GDP growth) and increase debt, while inflation remains tame or possibly some deflation. Not the worst of all worlds, but certainly not a panacea.
2) Print/spend just the right amount. This can possibly lower unemployment, increase GDP growth while increasing debt and getting tame inflation. The problem here is how do you pull back on spending without causing another recession and, more importantly, how much debt can you run up before that
3) Print/spend too much. Obviously this will cause inflation/hyperinflation/stagflation. Every FOOL here knows you don't want to have too much money.
So lets take a closer look at #2. The argument is simple - gov't ratchets up spending, people go to work, the gov't reduces spending, the economy is self-sustaining, and everything goes back to the way it used to be.
The sad reality is that the above scenario has never happened before. In every scenario where this has been tried, only a major economic change has saved gov'ts from going bankrupt OR they have eventually capitulated and let the deep recession occur. Let's look at the recession of 1990-1992. We ran up big debt in the 1980's and went from being the biggest creditor nation to the biggest debtor. The recession hit, but we didn't cut spending. Things were looking bleak, but the young computer industry took hold, spurred business by making them more efficient, and the recession was a minor one. Congress couldn't keep up with the new revenue and debt was reduced (yes, we can argue about Social Security funds).
In 1982, we finally broke out of our 10 year debt by killing inflation with 18% interest rates and massive debt. While some will point to this as a #2 scenario working, reality is that it was more about the deep regulatory and tax cuts that spurred the recovery. Spending was only a tool Reagan used to get the Democrats to go along with the cuts. But that spending came back to bite us only eight years later and the computer age saved our collective butts.
But #2 is such a positive outcome, why won't it work? For one, OIL! Once this economy starts moving again (via gov't financing) the futures market will start pushing oil over $100/barrel and maybe much, much more. As an economy driven 70% by the consumer, watching billions of dollars evaporate into their gas tanks, its not hard to see that a growing economy will only hurt consumers. This will require MORE spending to keep the economy moving, pushing us further and further into # 3 scenario.
The solution is simple - bite the bullet and pay down debt. Two years of hell is not a lot to pay for thirty years of excess, yet most Americans don't want to pay a DAY, let alone two years. So while the solution is simple, the outcome is not. Expect more of the same unless big changes happen in November.