Recent “less-bad” economic data, combined with huge stock market rallies, have convinced Americans that recovery is underway. Most fail to realize that the whole thing relies on deficit spending. This chart (from EconomPic) offers a reminder on just how much dependent this “recovery” is on continued government support.

total-government-lending

Banks don’t want to lend in this environment. They’re getting by on accounting rule changes and taxpayer “generosity”. The Fed’s liquidity is the only thing propping up this zombie economy.

The Feds have already spend trillions, with mediocre results. Year-over-year data remains ugly, despite the drastic measures taken. These levels of spending are clearly not sustainable. No substantial reform or change has taken place. (For more on the prospects for meaningful financial reform, see my recent interview with William K. Black.)

Yanking The Rug Out

If this massive support is withdrawn, as The Fed has promised it will “when the time comes (but definitely not too early!)”, the rally will promptly reverse. That doesn’t mean that we should try to fight the current trend, but it is reason to be cautious.

How long can we reflate the bubble this time?

It could go on for a while. Karl Denninger reckons America has no more than 10 years until a total monetary-system collapse. This assumes, of course, we don’t immediately change our policies. He used optimistic growth numbers in that analysis, even excluding social-security and medicare liabilities.

There are countless factors to consider. Regardless, we have to take the hit at some point; either through continued inflation/dollar-destruction, or sound financial policy (resulting in a painful, but necessary correction). The longer we wait, the bigger that correction will be. I hope a this market-cleansing is allowed to take place, but realize how unlikely that outcome is. America will take the easy way out until it’s no longer an option, and then a nasty funding crisis seems inevitable.