The End of Federal Stimulus
Come next month — for this first time in almost three years — the economy
will stand entirely on its own with no stimulus help from Washington. Since
the beginning of the year, I’ve been warning that this development is likely
to translate into difficulty in the markets this spring.
The prospect for additional fiscal stimulus disappeared with last fall’s election
of the Republicans to Congress on a cost-cutting platform. (The 2010 yearend
tax compromise was the last gasp for fiscal stimulus before the new
austerity set in.) Similarly, the Fed has announced that monetary stimulus
(QE2) will end in June.
Indeed, not only is stimulus ending, but normal government spending is
being cut back. Congress agreed to $38B in spending cuts last month to
avoid a government shut-down. And more cuts are on the way as Congress
addresses raising the government’s borrowing limit and a budget for 2012.
Speaker Boehner is calling for $2 trillion in additional cuts to address the
debt ceiling alone.
For over a year, I’ve posited that the markets have greatly benefited from
$2 trillion of government stimulus, coupled with the loose monetary policy of
QE2. When the new Congress convened, I predicted that the markets could
be in for a rougher time come spring when stimulus and QE2 would end.
That time is now upon us, so the recent wavering in the markets is not
surprising, — indeed, it may be just beginning.
