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Economic actor of only resort…

December 11, 2008 Leave a comment Go to comments

The US federal government is now the lender, borrower, and counter-party of only resort. This is sign of the complete collapse of the process begun in 1950 with the adoption of National Security Council Memorandum 68.

The consequence of this collapse is the steady expansion of federal spending as a percentage of GDP, noted in this USA Today article:

The government’s spending surge to ease the financial crisis and a worsening recession is increasing the federal share of the nation’s economic activity close to $1 out of every $4, the highest level since World War II, an analysis of current and projected payments shows.

Emergency rescue plans for financial institutions and increased benefits for needy individuals are mounting, as Congress considers President-elect Barack Obama’s call for a massive public works program that could exceed $500 billion and a $14 billion bailout of the auto industry.

All that spending will push the federal share of the nation’s $14.4 trillion economy to 25% or more — past the post-World War II record of 23.5% set in 1983, at the end of what was then the worst recession since the Depression.

Economists warn that the fast pace of government spending could spell trouble in the future: slower economic growth, higher interest rates, and the likelihood that tax increases or spending cuts will be needed to tame a budget deficit headed toward a record $1 trillion. The government reported Wednesday that the deficit for the first two months of the 2009 fiscal year was more than $400 billion.

“That’s the opposite of what we’re trying to do to the economy,” says Maya MacGuineas, president of the non-partisan Committee for a Responsible Federal Budget. The government should boost spending, but “we have to do it really carefully,” she says.

As the Messaih unveils his stimulus package, consumer, employer and investor of only resort appears likely to join the above categories of economic actors suddenly displaced by government in this crisis.

In one market after another private capital is fleeing. In its place, Washington is looking a little like a guy trying to plug multiple holes in a fast weakening dam.

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