The economy actually would have gone into a severe recession after the Nazdaq crash, but Greenspan zeroed rates. That created false demand via massive debt accumulation in the private sector. Consumers bought way more shit than they could afford, which "papered over" the Naz and offshoring fallout. Also bear in mind, the deficits in early to mid 2000, while relatively small to todays numbers, were 2.5-3% of GDP. That's a big deficit. Deficit spending isn't one-to-one. For every dollar spent, it circulates through the economy and creates more demand than just the contractor who is paid first. So the deficit is actually a much stronger fiscal tool than we think. In actuality, the Naz and Sept 11th would have precipitated probably a Depression. However, at that time, consumers had equity. So Greenspan dropped rates, consumers leveraged their balance sheet, blew their HELOC load, which juiced the hell out of the economy, which created huge over-consumption, which made it appear no jobs were lost from Naz or offshoring, when there were...
Bring us up to today. Why a bad recession? Bubbles destroy wealth. Consumers went long stocks and homes into the collapse, at hugely inflated prices. And their wages didn't keep pace. In many cases, they didn't grow at all! So here the consumer is, tied to a house or stock portfolio they leveraged themselves to the moon to buy, expecting the market to go up forever and flip it (like they had), but they got caught long. Now, they have to pay that 500K teaser loan or HELOC back, on a schoolbus drivers salary. That's the problem. So now, most consumers discretionary incomes are decimated. Most of their paycheck goes to payoff their 600K mortgage on some shitty 2-bedroom spec home that today appraises at 450K, if they can find a buyer...
If you look at the GDP formula, private consumption got wiped out. Consumers maxed out their debt-to-equity and got smashed in the process. Now they must pay down all that huge debt they accumulated back in the early 2000's, at wages that never grew....So they ain't buying shit. Those that are solvent, are paying paying paying to Citi, JP, whoever. No perks, no vacays, no cars, no homes. Back to basics. This is why retail, durables and home sales are crap. So the Government stepped in to prop up GDP via deficit spending.
This is where people don't get it, I imagine because they're not familiar with how GDP is calculated. Government consumption is part of the formula.
So now we have Government spending 10-12% of GDP, and what are the recent GDP prints like now? Flat. Zilch. Nada. That means, at the very least, if that deficit stimulus is removed from GDP equation, GDP will drop by at least around 10-12%.
