As the new year opens, the stock market is behaving as if the past 20 years were about to repeat themselves: Another recession will turn into a robust expansion. Stock prices already are discounting an earnings recovery to something only slightly below the level before the financial crisis. Risk-taking is in vogue again.
The global economy, however, is like a marathon runner who ran too hard and hurt himself. This runner has been injected with some industrial-quality steroids, and away he goes. As the steroids kick in, his pace accelerates, as if the injury never happened. He’s up and running, so he must be OK, judging from his speed and his progress.
We may think the runner has recovered from his injury, but steroids have their costs. They exaggerate true performance and mask pain, and the longer an athlete takes them, the less effective they are. Addiction is likely.
The world’s economy suffered severe injuries last year, and to keep it going governments have injected massive doses of economic steroids called stimulus. It’s everywhere, but the U.S. is one of the biggest users.
To help the auto industry, government — more specifically taxpayers — subsidized the purchase of cars through the cash-for clunkers program, creating artificial demand. Uncle Sam also seems to be pumping lots of money into GMAC — the credit company that provides mortgage and auto financing and insurance and which formerly was a GM unit, but now is majority owned by Cerberus Capital and the federal government.
[ Also read: Our Steroidaly Challenged Economy ]