We probably have turned in the economic recession, and have moved back into the ascent. This may seem surprising to you and me, but we must deal with reality, and the reality is that the stock market always tells you several months ahead of time as to what will happen. As for the economic recession, one need only look at the action in the stock market. It bottomed in March of 2009 at 6500 approximately, and now has moved up over 3000 points from that bottom, which is a 40% plus move. If you knew nothing else, the market is telling you that we have turned the corner. Soon, economic data will begin to be broadcast that will confirm the change in direction. Housing starts, a deceleration in unemployment rates, and bank credit coming back will be just a few of the confirming statistics to watch for.
If you look at the economic recession we are currently experiencing, you should be wondering whether the exorbitant government spending which has taken place will in the end shorten the recession or lengthen it. Also one may ask how this compares to recessions in the past two centuries. The place not to go for your information is television and newspapers.
We find that the commentators are all jaded in their approach depending whether they are Keynesians which means they will say one thing. On the other hand, if they are free marketers like Milton Friedman, they will say another. It all depends on the prejudices they view the world through. I have been troubled for a while, by the concept as to whether or not economic recessions have been cut short by big government spending? The inclination is to hope that they are. Here’s the real issue. If you remember, not so long ago, the government at President Obama’s urging, approved $800 billion of stimulus spending. Was this enough to shorten the recession? Could the economy be worse off, by government spending crowding out private borrowing capacity?
We have to understand history to answer the question. We also need to know about the economy, and economic theory. So where are we today? The American government as of this writing has spent stimulus money in excess of $120 billion. The original package was $800 billion once again. The $120 billion is a mere fraction of what was available to spend. Work out the numbers and it equals about 1% of the United States Gross Domestic Product. If you look at the $120 billion, only about $53 billion was spent on tax cuts which are temporary. Some went to unemployment benefits, food stamps, and Medicaid expenditures. What we would call the safety net expenditures.
President Obama spoke months ago, in terms of using funds for highway construction as well as bridges. When you look at the actual expenditure numbers, we were surprised to find that about a billion dollars had actually been spent on highways and bridges. This was an $800 billion plus stimulus package. A billion dollars is chop liver. Spending it in the future doesn’t help or impact the economy today. The money needs to be spent today, not years from now.
There is a non truth that keeps getting told about the Great Depression which began back in 1929. According to the story back then, the government under Herbert Hoover cut government spending. It was John Maynard Keynes the English economist who came up with the modern economic theory that explained recessions and depressions, and how to affect them using government spending. As you probably remember, Keynesian theory stated that you must increase government spending in a recession to over compensate for the lack of consumer spending because consumers had less money.
The reality is that Hoover did expand spending significantly during his one term in office. From approximately 1929 until the beginning of 1933 when he left office, he continued to spend. Government spending in 1930 was up over 6%, and more than 7% in 1931. It increased dramatically again to more than 30% in 1932. The economy was rapidly contracting during these years. This implies that prices were collapsing, and therefore government spending was much bigger than the numbers are portraying.
We will look at two periods. During the 42 year period from 1887 until 1929, recessions lasted about 10 months. If you look at the second 42 year period beginning in 1887 and ending in 1929, you find much the same thing. During this second period there was only one recession that went as long as 16 months, and none longer. During the first of these long 42 year periods, the Federal Reserve Board did not exist, and during both, there was little to no government intervention. The Woodrow Wilson Administration created the Federal Reserve Board in 1913.
Judging by what we have seen so far, it’s apparent that recessions have gotten longer in duration in the last 90 years. Back in 1920 the recession lasted two years, and then there was a four year recession lasting from October of 1929 until 1933, during the Great Depression. In 1937 America went right back into recession, again called the Great Depression, and that one lasted until 1938. Keep in mind that during this period we had both a Federal Reserve Board, and an interventionist government. Social Security was originally created to get people retired during this period. This meant that some of the jobs given up by retired older workers could be turned over to younger people who were desperate for the work.
The recession of 2008 and 2009 began under President Bush, and continued under Obama, and may have ended in August of 2009. We will only know that in retrospect. We do not believe however that the Congress ended this recession by creating the $800 billion stimulus package. The restoration of confidence in the American restored the system. The saving of the banks and also injecting close to $1 trillion into the banking system, saved the system. The credit belongs to the American taxpayer, and his willingness to save the greedy bankers, none of whom have been punished in any way for their transgressions.
The American people who believe that the system was saved by government intervention with the banks got it right. The full faith and credit of the government of the United States ended this current recession, which means the American people saved the system from going over a cliff. No one seems to recognize that this is the taxpayer’s money and not the politicians who are part of the problem every time we are in trouble.
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Goodbye and good luck