Perception on recovery is false

The perception that a recovery through financial stimuli creates a multiplying effect for growth, from which the government easily can exit, is false.

The common idea that almost everyone believes is that government economists can improve the functioning of an otherwise free market economy. Which as a result leads people to believe that the feds have pulled off a recovery and that now the economy is on the road of revival by getting stronger as time goes by, followed by the feds safe exit from their stimulus efforts.

The big question in most investors' minds is: how quickly will the feds exit? As long as they keep up their stimulus efforts, investors expect rising prices and results for everything, but the dollar.

Those who think the feds will be able to exit quickly believe growth will come without too much inflation. Those who think the exit will come slowly expect higher rates of inflation.

This perception is false too. From the beginning to the end it is a delusion of grandeur!

The theory behind the recovery concept is that government spending and stimulus from the Fed has a "multiplier" effect. That says, the feds money goes into the economy and from there it goes into the private economy with multiplying effects on spending, creating growth in consumption and investment of its own. If there were no multiplier effect the whole exercise would be a waste of money and time, because it is known that government spending in itself is a cost to an economy, not a source of real wealth, because it is taxpayers’ money that’s spent. Government spending, generally, is a drag on prosperity. The Communist Soviet Union was proof of this. The question remains however, can extra government spending at critical moments "prime the pump" so that it is multiplied by the private sector? The answer is NO.

"Our new research," writes economist Robert Barro in The Wall Street Journal, "shows no evidence of a Keynesian 'multiplier' effect...the available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise the GDP by less than the increase in government spending."

Next question: In the current situation; is there any evidence of growth beyond the government's own stimulus efforts? From what is witnessed so far –see the result from ‘cash for clunkers’-, the answer is 'NO.'

Consequently the idea of recovery →multipliers→growth and an exit from it is wrong.