The stimulus program is a failure, most of the action will not take place until 2011. This was not a stimulus package this was a spending bill. The banks are not lending out the money given to them through the TARP and have restricted credit. The velocity of money is extremely low because of it. For us to have inflation, the wage rates have to go up and people have to go to work until the employment situation improves the people who are working are saving money instead of buying big ticket items.
I see the unemployment rate rising through the 2Q of 2010 with a high of 11% to 11.5%. In that environment the banks are going to restrict credit further. The credit card restriction the Obama Administration put on the credit card companies will cause these companies to restrict credit further which again with slow the velocity of money and a decline in real and nominal GDP.
Ms * V = GDP (Monetarist)
Even if the the Money Supply is increased if velocity decreases by a larger amount the GDP will decline. I wrote my Masters’ Thesis on this subject, we thought that velocity was constant or predictable I argued that velocity changes with unemployment rates , restriction of credit caused by increased defaults caused by an economic slowdown and a decline in perceived wealth.
If your an Obama Economic Fan and believe in Keynesian Economics it still holds true.
C + I + Gs + Nx = GDP
(C) Consumer Spending is down + (I) Investment Spending is down + (Nx) the net exports are down but (Gs) is up big time. However, the increase in Government Spending has not offset the other three factors so we are going to see a decline in both real or nominal GDP because the banks are not lending the credit for investing thus not creating new jobs.
If the Obama Administration want to spur growth in the country they need to force the banks to start lending or the government themselves create low interest loans for business and motgages if they want an immediate impact on the economy.
Without that this economy will be in downward trend for the next three years and in the doldrums for the next decade after that if the Government does not change their policies. I see a Market decline in the near term to 7000 on the Dow and 750 on the S&P. I see gold dropping below 900 this month and under 800 by the end of summer and we could see gold under 700 in 2010.
If the Obama Administration were to bypass the banks or force the banks to lend with back up from government securities you will see the Market takeoff, Gold hit$1500 and Unemployment drop to 5% in a hurry. But we will have an inflation rate of 10% or better
Related post: Inflation – the real threat to sustained recovery
