But there's a point to be made about the eventual prospects for recovery, jumping off Doug's summary of Dueker below. First of all, the stimulus won't save us in the short term because it will probably be something like 8 months until money can *start* flowing into the economy from public works. Eight months without real stimulus is enough time for unemployment to set a post-Depression record and then some. But that said, it's safe to assume that enough emergency stimulus can eventually put an end to the recession, or at least the worst of it. But what happens then?
Just as public-sector deficits "stimulate" the economy, so do private-sector deficits. The last 20 years saw a long-term, massive, secularly increasing injection of such stimulus, which is where much of aggregate demand came from over those years. But of course it eventually left US households with an enormous stock of debt and in a state of extreme financial fragility, which provoked the current financial crisis. So, looking beyond the immediate recession of the next 12 or 18 months, let's assume the financial sector just won't support/allow households to do the same thing all over again. Where is aggregate demand growth going to come from then?
There are only two possibilities: the public sector or the rest of the world. Right away, then, you can see how the US economy's *long*-term prospects - not just the immediate recession situation - depend much more than usual on politics. To replace the function that rising household debt played in the 90's and 00's, the US govt would have to take on an ever-expanding deficit. Will the political system support that? Will Larry ("deficits in recessions, surpluses in recoveries") Summers support that? The other possibility is the rest of the world. But that would require a large dollar depreciation against the Asian currencies, notably China's. To see how this becomes an international relations issue, this is from a profile in today's Politico of James Rickards, former LTCM honcho and now a consultant to US intelligence agencies on financial issues:
http://dyn.politico.com/members/forums/thread.cfm?catid=1&subcatid=3&threadid=1854265
> The Chinese own more than $500 billion worth of U.S. Treasury bonds,
> and billons more in the debt of other U.S. entities such as those held
> by Freddie Mac and Fannie Mae. And a general sense of mutually assured
> financial destruction keeps them from wielding that debt like a
> weapon: if the Chinese dumped U.S. debt on the global market, their
> own holdings of U.S. debt would decline in value, the U.S. economy
> would be damaged, ultimately harming the Chinese economy by reducing
> American ability to buy more Chinese goods.
>
> They’d have to be crazy to try it. But Rickards points out that
> governments don’t always do the rational thing. And in the meantime,
> their holdings give the Chinese incredible power over American
> decision making.
>
> “It gives the Chinese de facto veto power over certain U.S. interest
> rate and exchange rate decisions,” Rickards explained. “For example,
> there’s a limit to how much dollar depreciation the Chinese would
> tolerate.”
Basically, the US's vital national interest in a recovery from the recession and China's vital national interest in the continuation of its export model will be in direct contradiction.
The US has a lot of problems that it will be facing for a long time.
SA