... the odds are that any good economic news you hear in the near future will be a blip, not an indication that we're on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are. The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That's far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done -- and the illusory good numbers we're about to see will probably head off any further possibility of action. Meanwhile, all the talk at the Fed is about the need for an "exit strategy" from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It's widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn't raise interest rates directly -- and there's a lot of pressure on Mr. Bernanke to do that too. Will the Fed realize, before it's too late, that the job of fighting the slump isn't finished? Will Congress do the same? If they don't, 2010 will be a year that began in false economic hope and ended in grief.
The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That's far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done -- and the illusory good numbers we're about to see will probably head off any further possibility of action.
Meanwhile, all the talk at the Fed is about the need for an "exit strategy" from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It's widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn't raise interest rates directly -- and there's a lot of pressure on Mr. Bernanke to do that too.
Will the Fed realize, before it's too late, that the job of fighting the slump isn't finished? Will Congress do the same? If they don't, 2010 will be a year that began in false economic hope and ended in grief.
My expectation is that, some time during 2010, the disconnect between the financial markets' euphoric expectations and the hard reality of a deleveraging private sector will bring the optimism of both "born again Keynesian" neoclassical economists and the markets to an end. Growth will not resume once the stimulus packages are removed, since deleveraging will then assert itself in the absence of government stimulus. Falling debt will subtract from growth, as it once added to it, and unemployment will start to rise again.
... and unemployment will start to rise again.
But that's not a problem because they can always phoney - up the statistics. In the end, might makes right. Nothing has changed since the caveman.
