This week we witnessed a clear reminder of how easy it is for government to agree to spend money compared to how hard it is for government to agree to save money. If this week's lesson is any indication of our collective national tendencies, then the current economic decline will be much deeper and longer than anyone in authority would care to admit.
The Federal Reserve under Mr. Bernanke has assured us that the recent wave of increased liquidity will be promptly removed from the market once it is no longer needed. The implication is that this will be relatively painless, and that the process can be done independently by the Federal Reserve without interference from political interests.
When we begin to tally the total cost of the bailouts so far, the Fed has recently increased their balance sheet to over $2 trillion, of which well over $1 trillion is "new" lending. This does not include other mechanisms used to increase liquidity. But let's start with this number.
Meanwhile the Treasury has committed $700 billion to providing funding for stimulus and increased spending for projects that should help the economy recover more quickly.
These two sources alone total nearly $2 trillion. That's a lot of money in anyone's book. While there was a little push-back against this level of spending and lending, there was really no serious doubt that the funds would be made available. The main question was how many strings and restrictions would be applied. The sheer magnitude of the number is stunning for anyone who follows these things.
And thus in just a matter of months, the government has agreed to one of the largest spending sprees in our nation's history. Some believe that this spending will save the country, some believe that it will ruin the country. I will leave that question for a later discussion. My point is simply the magnitude of the number and speed with which this number was approved.
Then this week President Obama released the details of his annual budget. He said, ""We can no longer afford to spend as if deficits don't matter and waste is not our problem." And "We can no longer afford to leave the hard choices for the next budget, the next administration or the next generation."1 He confirmed that there are government programs that are ineffective and overly expensive. After a thorough review of the $3.55 trillion dollar budget, he recommended $17B in spending cuts. Once again, we find a number that is stunning by its magnitude. However this time the magnitude is stunningly SMALL. It represents less than a couple of months' worth of interest on the incremental spending that was just recently approved. And yet President Obama will probably have as much if not more trouble getting this small savings approved than he did to get the much larger spending increase approved.
The strength and timing of this recovery will depend upon all Americans finding ways to do more with less. Our spending simply got ahead of our earning, and we accumulated an unsustainable level of debt before we came to our senses. But if we as a people have as much trouble reducing our spending as the government is having, then this recovery will be a long time in coming.
What makes this recession different from recent recessions, is that our current debt level is not sustainable. In previous recessions we could litterally spend our way out of a recession into a recovery. That won't work this time. We really do have to de-leverage and live within our means. That is one of the hardest financial maneauvers known to man - to voluntarily reduce spending and to move from instant to delayed gratification.
Of course if we are unwilling to live within our means voluntary, history suggests that we will end up doing it anyway - even if it has to be involuntary.
President Obama has his work cut out for him.
1 http://www.reuters.com/article/newsOne/idUSN0734856620090508
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