There is some light at the end of the proverbial tunnel on the economy. Some economic measures are showing modest improvements while others are still decreasing, but at a lessened rate. Forecasters are becoming more confident that the recession will end in the second half of this year followed by at least a modest recovery in 2010. Unemployment will continue to rise and may stay stubbornly high in the first half of 2010 (maybe around 10%). This forecast is consistent with Fed thinking as expressed by Fed Chairman, Ben Bernanke, on several occasions.
I believe this scenario is all but assured. Monetary and fiscal policies are more aggressive than in any period of U.S. history. Assuming there are no more hidden financial icebergs out there, this historic stimulus will jump-start the economy.
Monetary policy has lowered the overnight Federal Funds rate to essentially 0%. The Fed has pumped so many reserves into the system (leading to excess money creation) that the Fed's own balance sheet has more than doubled, and is still growing
Fiscal policy (government tax and spending policies) is also unusually aggressive. Last year's deficit was $458 billion. The projection so far this year is for a deficit of $1.8 trillion.
The problem with this much stimulus is the potential deleterious side effects starting in 2010 (hopefully not this year). Because of huge deficits and money creation we probably face high interest rates and inflation not too far down the road.
The challenge for policy-makers will be to unwind the stimulus so that the expected recovery will lead to a sustained economic recovery that does not peter-out into another recession, unusually soon after this one ends. I will be monitoring this over the next several years.
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