Sunday, April 22, 2012

The necessity of government spending

A depression was borne out of high levels of private sector debt made apparent by a financial crisis.
The effects of this depression have been lessened by economic stimulus and government support.
Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.
While I might quibble with his time frame and the necessity of government spending (a bit too Keynesian), it is a valuable piece that provides background for those attempting to understand better what has happened and what the future may hold.

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