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Thursday, March 19, 2009

Will the Economy really recover by 2010?

There have been some rosy predictions about the economy lately. Federal Reserve chairman Ben Bernanke predicts the recession will end by the end of this year and the recovery will begin in 2010. Markets have rallied with news the U.S. government is pumping $1.15 trillion into the financial and housing markets.

On the other hand, we are still seeing housing prices fall and unemployment figures are continuing to rise. Factor in that AIG is not exactly financially healthy and we have the recipe for disaster. Apparently, AIG requires bonuses to keep their 'talent' - the same talent that got them into the mess in the first place. The bonuses are supposedly to ensure they don't leave and force AIG to require another massive bailout.

Additionally, we aren't seeing a sudden surge in consumer spending, nor are we seeing a recovery in the auto industry. I think Mr. Bernanke is looking at different numbers than I am. Of course, one can reasonably argue that half the problem, and thus half the solution, is consumer sentiment. If optimism returns, people may begin to spend again, which will, presumably, strengthen the economy.

On the other hand, with consumer debt at record highs, maybe spending money we don't have is part of the problem. Combined with a huge government debt which is steadily climbing and the fact that China has indicated a concern the U.S. is simply printing money, thereby devaluing China's investment in the U.S. and we are faced with a less rosy outlook.

Quite frankly, I don't see an end to the recession by the end of the year. I certainly don't see a recovery by 2010. I hope I'm wrong of course as nobody wants to be the harbinger of doom, but I just don't see how everything will turn around in a year.

Pushing through massive stimulus packages quickly may be required to help the economy but the risks of abuse, poor decisions, and recklessness are directly proportional to the speed with which the bailout is implemented.

A bit of a catch-22.

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