Government Bailouts and Stimulus: What They Could Lead To

Our current government bailouts and stimulus packages attempt, among other things, to prevent deflation. While the bailouts focus on saving certain industries (mostly banking), the stimulus packages focus on fighting deflation.

Deflation is considered a great bugaboo by government. While there is an excellent argument to be made that a slow, gradual deflation is a good thing, a severe deflation could create terrible economic hardship all around.

The collapse in the value of stocks, real estate and the credit markets in 2007-2008 was a deflationary event. Simply put, the prices of these items deflated, the way a balloon deflates when you prick it with a pin.

In addition to these assets deflating, the economy as a whole began to slow down.

Government bailouts, because they come from the government, have a political side to them (obvious enough). Bush and Obama looked to score points in their own ways. That's just the nature of things.

Let's look at another situation where governments get involved in bailouts and stimulus programs and see what typically happens. I'm quoting from an October 26th article by Mary O'Grady, who writes about Latin America for the Wall Street Journal:

One way a president can boost poll numbers in a bad economy is to wrest control of the central bank and start printing lots of pesos. There's nothing like cheap financing to restore the market's enthusiasm for buying all sorts of stuff—from stocks to houses—already on sale at fire sale prices.

The great reflation will make people feel rich again. A weak currency will also be a short-term boon to exporters, whose profits can then be taxed at ever higher rates. Complainers can be denounced for their greed.

Of course this perpetual motion machine will eventually conk out and when it does, a government that expects to survive will find it necessary to silence its critics.

Now we're not quite a banana republic - yet. And the U.S government isn't "silencing" critics exactly the same way that the stereotypical Latin American government has in the past. But doesn't some of O'Grady's description strike a chord? Of course, it only makes sense that the government would try to score points with us - try to show us how their policies are making things a whole lot better.

Right now, the stock market's been going up and real estate, while not really going up, is said to be "bottoming." GDP numbers have turned positive. It's a lot "calmer" now than it was in 2007-2008.

The real question is: how real is all this? With the end of 2009 drawing near, and December traditionally a good month for the stock market and most other markets, it looks like we'll be finding out more answers in 2010.

In the meantime, you can either relax and start investing your hard earned money in stocks, bonds and real estate again, or you can take the more cautious route and take a "wait and see" attitude.

Just remember that the government - always involved in a big way in our lives - has gotten into things in the last couple of years with both hands and is pulling a lot of strings and levers to try to control and manipulate the economy. But, as opposed to the Latin American model described above, we're still hearing that the government can't wait to let go once the economy starts humming.

We'll see. You have to hope they don't want to keep controlling things, that they don't really want to continue to run the economy of the United States. They're not especially known for running a tight ship, or driving revenues to the bottom line, or all those other things good business management does.

So, on the one hand, I can't wait for 2010 to find out where all this is leading. On the other, I think I'm just about ready for a good, long Christmas-New Year's break from all this. Is there some sort of government incentive out there for taking a vacation?