Anatomy of a Recovery

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The forces behind our recovery can almost be summed up in one sentence: We have used debt to create the illusion of economic health. However, that same debt is now starting to cause some major problems. And exactly what can the people who got us into this fix do about it? My guess is that we'll see some minor cuts in the budget deficit to keep foreign investors from losing confidence. And I wouldn't be surprised if the Federal Reserve produces more money to make up for any negative impact the remaining deficit might have on our economy. By taking these steps, it may be possible for us to keep the recovery going for a while yet, although the Fed will eventually drive up inflation if it continues easing up on the money supply. Of course, this short-term "positive" outlook is based on a few assumptions: that oil prices stay low but don't go too low, that foreign investors don't get too nervous about the deficit or inflation, that the farm crisis doesn't get any worse, that protectionist sentiments don't lead to courses of action that do more harm than good, and that Washington doesn't do something incredibly foolish (like letting the deficit balloon).

Over the long haul, though, the situation looks less promising, but—if nothing else—we've bought ourselves some time with our debt-financed recovery. Perhaps we can use this time to devise solutions to the economic problems looming on our horizon. Unfortunately, unlike debt and complacency, solutions are in short supply these days.

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