It highlights the issues of judging the timing of when to remove depressionary stimulus and the distortions to decision-making that will inevitably occur, culminating in withdrawal that's too early to sustain a recovery 'escape-velocity'.

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“…In dealing with the continued weak economy, our leaders are so determined not to repeat the perceived mistakes of the 1930s that they are risking policies with possibly far worse consequences designed by the same people at the Fed who ran policy with the short-term view that asset bubbles don't matter because the fallout can be managed after they pop. That view created a disaster that required unprecedented intervention for which our leaders congratulated themselves for doing whatever it took to solve. With a sense of mission accomplished, the G-20 proclaimed “it worked.” We are now being told that the most important thing is to not remove the fiscal and monetary support too soon. Christine Romer, a top advisor to the President, argues that we made a great mistake by withdrawing stimulus in 1937. Just to review, in 1934 GDP grew 17.0%, in 1935 it grew another 11.1%, and in 1936 it grew another 14.3%. Over the period unemployment fell by 30%. That is three years of progress. Apparently, even this wuld not have been enough to achieve what Larry Summers has called “exit velocity.” Imagine, in our modern market, where we now get economic data on practically a daily basis, living through three years of favorable economic reports and deciding that it would be “premature” to withdraw the stimulus. An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.” …” – Liquor before Beer – David Einhorn, Greenlight Capital, Oct 2009.

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That could be a significantly under-estimated problem–politically.

But there's a more worrying and immediate problem–not enough state tax revenue is being collected. This is going to force US states to raise taxes quite soon, regardless of the politics or questionable economics of doing this in a 'weak-recovery' — recession by any other name.

Like it or not, structural budget shortfalls must be and will be met, with higher surcharges, until that also proves inadequate. This will happen before Federal stimulus is withdrawn, so will tend to cancel-out each other.

The alternative is Obama uses public money (even sooner) to bailout any defaulting US states (probably several ‘big-economy’ states—it will be very expensive). Obama is compelled to use public money in the event of any actual state default. Now imagine living in a state that didn't default but now have to pay an extra Federal tax burden, plus have a slower growth-rate 'recovery' because your neighbour state defaulted.

National Federalism has a sting in the tail.

As with the stimulus withdrawal dilemma, this tax problem isn't US specific. Tax revenues are cliff-diving–globally.

In a “new normal” there's a smaller global tax-take. The visible effects are still barely noticeable (in most countries) but in two years the effects will show up. Potholes that don't get fixed after it rains, sewers that don't get repaired for months, and only after pressure is applied, etc. It's not here yet, but will come.

If the globe gets another leg-down, or the sawtooth 'recovery' (Edward expects), the taxation shortfall gets worse each cycle as unemployment rises. Plus withdrawal of the stimulus becomes more economically unthinkable so is delayed each time, thus deficits and debt keep growing (as per Japan).

It's a 'd'epression — 'phoney-war' phase.

On Thurs Nov 5th 2009 an excellent new Australian series, made for global TV distribution, called “Addicted to Money” was first aired on ABC TV. The host, David McWilliams, finalised the first installment of the series with an absolutely blistering summary of recent events, ending with; “…Make no mistake about it, this was the biggest scam in financial history. Tens of millions of jobs have been lost, livelihoods wiped out, and the prospects of a generation, a young generation, have been mortgaged. And the culprits, the bankers, who paid themselves enormously, the regulators who turned a blind eye, and even the governments who cheer-led–they are not going to end up in a place like this [recorded in a high-security prison]. They're never going to be bought to Justice. And just to make matters worse, as we speak, your money is being used to bail these guys out. Now, how does that make you feel?” [walks off cam as credits roll]

Is good TV.

We're not in the hands of demogogues now? These are stable, well intentioned folks that lead us?

I say bring on as many fresh “demogogues” as you can, anything, if it will just bring an end to the cesspool that is our public life.