The US is spending its way out of the recession

The Federal Reserve has recently announced their balance sheets more than doubled in the past year.  The surge reflects increased government spending to try and combat the Great Recession.  That's hardly surprising.  The US Government has been consistently indicating its intention to spend, spend, spend.  The economists might as well predict that the sun will come out tomorrow or that the the recession will end one day.  

What most people don't understand is how government spending helps to soften the recession.  Down to its simplistic core, the economy can be broken down to four things:  consumer consumption, business spending, government spending, and exports to other countries.  That's right!  That's the expenditure measure of the economy:

GDP = C + I + G + NX

Consumer spending dropped dramatically because some people lost their homes, confidence, and their jobs.  The declining consumer consumption was and currently is red ink for the economy.  Business investments went down  because of less business, so another red slash.  Forget about the United States making some bank through exporting goods to other countries.  The US hasn't fixed it trade deficit in 60 years.

That only leaves government spending as a remedy to soften the recession.  That's why the government is loading up its balance sheet to help spur spending.  The idea is that jacking up the G in the equation will help to offset the declining Consumption and Business Investments.  With a slight benefit of hindsight, it's beginning to look like the increased government spending might be alleviating some of the recessionary problems.

For the investors, a good diversified portfolio should contain some bond holdings like TIPS (Treasury Inflation-Protected Securities).  Increased government spending should put inflationary pressures on the dollar making TIPS worthwhile.  The problem with TIPS is that the economy is going through a deflationary spiral and the return on TIPS are currently low.  If the government continues to jack up the G, consider balancing your portfolio with TIPS.

For the gamblers, the increased government spending may soon translate into a recovering or flat economy and it might be time to get back in the market.