THE US federal government has committed trillions of dollars to domestic bailouts and propping up the recessionary economy, much of it borrowed, much created out of thin air by the Federal Reserve. How much longer can this go on? That is the pressing question facing policymakers, and one without a clear answer. At some point, “You have to take away the punchbowl, as someone once said, in order to avoid the inflation risk,” said Federal Reserve Chairman Ben Bernanke, paraphrasing William McChesney Martin Jr., who served as Fed chairman in the 1950s and ‘60s under five presidents. But change course too soon, and it could nip a fragile recovery in the bud. Wait too long, and runaway inflation and gargantuan federal debt could be the sequel to the worst downturn since the 1930s. While nobody thinks the current combination of near-zero interest rates, bank and auto bailouts and trillion-dollar annual deficits is a sustainable economic model, knowing just when to take away the punchbowl is the problem. For now, the Bernanke Fed is still filling the punchbowl. And President Barack Obama and the Democratic-controlled Congress are doing the same with government spending. One reason the Fed has been so aggressive in slashing rates and taking unconventional recession-fighting steps is because “we are trying to avoid another form of price instability, which is deflation,” Bernanke told a Fed financial conference this week. The risk of deflation – a widespread and prolonged decline in retail prices, wages and real estate and other asset values – is “receding, but it certainly needs not to be ignored,” Bernanke said. Despite some recent glimmers of hope, evidence is mixed on whether things are getting better or still worse. Disappointing reports Wednesday on falling retail sales and a jump in foreclosures fueled continuing uncertainties and helped push stocks down. “You've got to take the stimulus off at some point. I don't think that point is this year,” said David Wyss, chief economist at Standard and amp; Poor's in New York. He said Wednesday's economic reports point to a continuing recession, despite some recent signs of encouragement. Government and most private economists expect the recession, which began in December 2007, to end this year, although they expect high levels of unemployment to continue beyond. In the meantime, recent developments are complicating efforts to tame the deficit once the recession ends: u White House budget officials said this week that the deficit would widen to a record $1.8 trillion this year, $89 billion more than their estimate in February. They blamed the recession. u With nearly 80 million baby boomers nearing retirement, the government reported that Medicare and Social Security will face insolvency sooner than previously projected because of the recession – for Medicare in 2017 and for Social Security in 2037. u A potential $90 billion shortfall opened up in paying for Obama's health care proposal. The gap comes from congressional reluctance to go along with his proposal to help pay for the plan by limiting high-income families' charitable-giving and other tax deductions. House Speaker Nancy Pelosi said the health care bill will be on the House floor before the August recess. u The administration asked Congress on Tuesday to add $100 billion in new US contributions to the International Monetary Fund as part of a war-spending bill. Obama proposed just $17 billion in new spending cuts last week, representing savings of less than one-half of 1 percent in his $3.4 trillion budget. Republicans scoffed and even some top Democrats criticized him for targeting popular programs in recessionary times. By some accounts, the sum of all the US grants, loans, guarantees and new money created electronically by the Fed since the financial crisis began totals some $11 trillion – roughly equal to the country's national debt. That sum includes loan guarantees that might not be needed, money that has not been spent, various revolving accounts and US investments in bad mortgages and other toxic, hard-to-value securities that could someday return money to taxpayers. Still, staggering amounts are involved. “We are creating a government debt bubble that we're going to have to deal with in a massive way,” suggested Rep. Kevin Brady, senior Republican on the Congressional Joint Economic Committee. History shows the dangers of calling the end of economic downturns too soon. President Franklin D. Roosevelt made this mistake in 1936 when, believing the Depression largely over, he sought to pare back public spending and to balance the federal budget. It torpedoed a fragile recovery and pushed the economy back under water in 1937. Japanese leaders made a similar mistake in the 1990s when they prematurely, and temporarily, withdrew government stimulus spending, helping to prolong Japan's recession to one that lasted a full decade.
