Guest Post: Is the Recovery "Self-Sustaining"? Here's A Test
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::
2004 $1.88 trillion
2007 $2.56 trillion
2010 $2.16 trillion
2004 $2.29 trillion
2007 $2.72 trillion
2010 $3.72 trillion
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.)
total: $6.258 trillion in five years.
And this isn't even the real total being added to the national debt, as “supplemental appropriations” for war costs and other large expenditures are “off budget” and not included in the “official” Federal deficit. The same is also true of funds appropriated to bail out mortgage giants Freddie Mac and Fannie Mae and other financial institutions.
Gross debt increased by $1 trillion fiscal year 2008, $1.9 trillion in 2009 and $1.7 trillion in 2010--considerably higher than the “official” deficit numbers. Debt held by the Public—which includes Treasury bonds owned by the central banks of China, Japan and other countries--jumped up 80% from $5 trillion in 2007 to $9 trillion in 2010.
Meanwhile, the U.S. economy has been treading water. In adjusted-for-inflation dollars, the U.S. Gross Domestic Product (GDP) in 2010 was almost precisely the same as it was in 2007: $13.363 trillion in 2007 and $13.382 trillion in 2010.
So the Federal government will have spent over $6 trillion--almost 41% of the nation's annual GDP--just to keep GDP stagnant. That $1 trillion a year in extra spending is 7% of the GDP, which implies that if the Federal budget returned to the carefree, free-money days of 2007, the GDP would contract by 7%.
And that's not even counting the trillions of dollars injected into the financial system by the Federal Reserve's opaque machinations and money-printing schemes.
So what is America getting for this extra $1+ trillion in Federal spending a year? Just more of the same old Status Quo that did such an outstanding job circa 2008-2010. I have rooted around a conflicting mess of reports on Federal spending, and found precious little of that $1 trillion actually flows to those suffering from the recession.
Consider the direct costs of the Great Recession: extended unemployment costs, and food stamps (now called SNAP, Supplemental Nutrition Assistance Program).
In 2007, SNAP cost around $30 billion. In 2010, costs rose to $68 billion as the number of people receiving SNAP benefits rose by 15.6 million people, or 57% to 43.2 million in October 2010. So costs rose $38 billion in those three years.
The estimated cost of continuing unemployment extensions is estimated at $65 billion. According to this New York Times graphic, total unemployment program costs in 2010 were $158 billion. So together, these two recession-related programs cost about $100 billion more a year.
Let's factor in inflation from 2007 to 2010: according to the Bureau of Labor Statistics (BLS), that accounts for 5% of any change. So $50 billion of that $1 trillion a year can be attributed to inflation.
The $787 billion stimulus package passed by Congress in 2009, the American Recovery and Reinvestment Act of 2009, is being spent over several years: $154 billion in 2009, $353 billion in 2010, $232 billion in 2011 and the remainder over 2012 and beyond.
Roughly speaking, that averages to about $250 billion for each of the recession-impacted years, but it doesn't affect the 2012 Federal spending plan much.
So where is the $1 trillion a year being spent? Around $350 billion a year can be attributed to recession-caused spending: extended unemployment, SNAP and the stimulus package.
That still leaves $650 billion unaccounted for in 2011, and more in the 2012 budget, which is not influenced by the little remaining stimulus spending. So in effect, the sum in 2012 is more on the order of $850 billion, as the stimulus funding drops to around $50 billion.
Next, let's look at the four big Federal programs:
2007: $276 billion
2010: $293 billion (+17 billion)
2007: $395 billion
2010: $462 billion (+67 billion)
2007: $586 billion
2010: $724 billion (+138 billion)
2007: $699 billion
2010: $738 billion (+39 billion)
(other sources list other totals, depending on what is included in "Defense." I leave the Department of Energy and Veterans Affairs as separate departments, but if you prefer to include them, you'll find the total budget appropriations for both of those departments increased by only a few billion.)
So these entitlement and Defense programs account for about $260 billion of the additional $1 trillion in spending. Add in the $100 billion in direct costs of recession and you get at most $360 billion. Add in inflation and you get to $410 billion.
So only $600 billion more each and every year is spent to prop up a voracious Status Quo. From various sources, here are the estimates for the Federal budget in fiscal 2011:
revenues (taxes): $2.3 trillion
(if the economy doesn't implode and the creek don't rise)
spending: $3.8 trillion
deficit--borrowed: $1.5 trillion
That $1.5 trillion is roughly 11% of GDP. The Fed has printed over $2 trillion to prop up the mortgage and Treasury markets, seeking to "extend and pretend" the valuations of defaulted assets held on the books, to suppress interest rates and last but certainly not least, to inject hundreds of billions of dollars in free money to goose the risk trade, i.e. stocks and commodities.
The Fed sees a "self-sustaining" economy as one which "only" needs $1 trillion in extra Federal spending and another $1 trillion in Federal Reserve goosing every year just to maintain the same GDP we had in 2007.
I suggest an addict analogy is more accurate: a high-cost, bloated, corrupt and inefficient cartel-State Empire of high-cost, bloated, corrupt and inefficient fiefdoms is like a heroin-addled junkie. The "high" of GDP "growth" keeps requiring ever-larger hits of smack; any slackening in this accelerating consumption of Marching Powder will send the addict careening into the agony of withdrawal.
So what we really have is a Status Quo that now needs $2 trillion or more in "free money" injected into its fiefdoms and Elites just to keep from crashing. It would laughable if it wasn't so tragic: here is Ben Bernanke, shoving the needle of QE2 into the twitching half-dead addict and declaring that the zombied-out junkie is on the threshold of "self-sustaining" something or other.
The only cure for addiction is cold turkey. By all means let's keep the methadone and nicotine patch of food stamps flowing, but the Status Quo--the fiefdoms and Financial Elites--will have to go cold turkey.
What does that mean? It's simple: you get the same bloated budget you enjoyed in 2007: $2.7 trillion is still a lot of money. But it is $1.1 trillion less than the $3.8 trillion 2011 Federal budget. Even at $2.7 trillion, we'd be running a staggeringly large deficit of $400 billion.
"Self-sustaining growth" ranks right up there with "we had to destroy the village to save it" as a classic of propaganda gone sour.