The Obama administration has created the textbook game plan in its handling of the recession, subsequent credit crisis, and sluggish recovery. Knowing that household and balance sheets needed to be shored up and that states needed some breathing room, the President kept the federal spigot opened to keep the recovery from slipping back into recession. Over the last three years, businesses have returned to fiscal health and many American households reduced their debt loads. Now as private and consumer spending ramps up, the federal government will be able to scale back its spending in 2013 and beyond. By keeping state coffers filled with federal money, states were able to keep teachers, fire, police and other state employees working through 2010 and while they have been forced to reduce staffing now at least the private sector is recovering to more than offset the public sector losses. It is classic diversification. Oh and those on the right that think it was the wrong thing to do? Go to Europe and see how that continent’s austerity plans are working out. Here’s a clue, it’s called double dip recession.
There was an interesting analysis in the Financial Times about the U.S gas and oil reserves. If the U.S. is able to SAFELY extract the massive reserves of shale gas and oil, it is entirely possible that the U.S. could become increase exports and in the process return to a positive current account deficit for the first time since the 1990’s. This will reduce economic drag on the economy as the negative current account deficits cost the U.S. at least 1% of GDP. As the U.S. economy heats up, the Fed will have to tighten interest rates to keep inflation in check. As the interest rates go up, the dollar rally will pick up speed and suddenly the price for all commodities, especially oil, gas, precious metals, will drop. Countries with large surpluses will start buying dollars again and the cycle will continue.