Friday, August 7, 2009

Economic recovery?

Recent economic data shows that things are not as bad as they once were or that we are actually recovering. I am not too sure. The Fed and Treasury have put a lot of new dollars into the system and the the Democrats in Congress along with President Obama are well on their way to spending the $787 billion in "stimulus."

The stimulus will temporarily push forward demand. Keynes argued that the government should increase spending during a recession and decrease during the good times. Unfortunately, we forget to decrease it during the expansions. Nevertheless, this stimulus is temporarily boosting the economy, but will result in lower economic output in the future, simply shifting demand from the future to the present.

Meanwhile, the sudden injection of tons of money into the system makes all economic calculation impossible. If you add a trillion dollars into the system, it appears like we are richer, spending more money, and companies increase their production. But it is all a smoke screen. It is simply new money devaluing old money, the basic financial situation has not changed. The "real" amount being produced and earned has not changed, though it has appeared to.

So it is impossible to know whether the economy really recovering or if we are simply shifting demand and creating an illusion.