GDP and Stimulus Discussion

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The expenditure method of quantifying GDP, Gross Domestic Product, is as follows:

GDP = C + I + G + ( X - M )

C is Consumer Spending, I is Gross Investment, G is Spending by the Government, X is Exports and I is Imports. Remember that two quarters of consecutive contraction in GDP is considered a recession.

As a thought experiment, let's assume that the consumer and business have tightened their purse strings to the bare bottom of what they need to survive with no extra spending or expansion. The mentality would be that there is too much risk for businesses to try to expand and too much risk for the consumer to not save every penny. In our GDP equation, this means that C and I are at absolute, relative zeros. We can consider these constants if there is no change in mentality.

Now we're left with GDP = G + ( X - M)

The U.S. has a number of exports; chemicals, consumer products, agricultural products, semi-conductors and computers round out the top spots. No one export is dominant, but on the import side you have Petroleum way out in front followed by Autos. Every other export pales in comparison to black gold. Less economic activity reduces demand and the price of oil on our shores. I read a few articles recently confirming that the spread between Imports and Exports has narrowed, thanks to the condition of the oil markets, which will have a positive effect on GDP.

Last, but certainly not least, we have capital G for government spending. There was a report on the deficit saying that we have reached a record $1.4T for the year. I had to search around and can't confirm this number, but $4T is an estimate of total government spending for the year. Total GDP in 2008 was $14.2T. Given these numbers, the amount of GDP that will be attributed directly to government spending will be substantial. If the stimulus checks stop running we could easily see further GDP contraction. I feel that will happen when either pressure from fiscal conservatives cause the rampant spending to stop or when you've devalued the dollar so much that any level of spending won't matter.

Two consequtive quarters of negative GDP growth indicate a recession and the double dip or W prediction seems to be enevitable. The only out that the U.S. economy has is if the private sector can change their no spend attitude and untighten their purse strings or that government spending can cause enough jobs to allow for the C and I parts of the GDP equation to take off more than what was initially spent.

The Great Depression was not averted by government spending, but by troops coming home from World War II. The returning troops got married, had kids, bought houses, bought cars, and spent the money that they would have earlier held on to. People's mentality changed since they were just concerned about losing their lives and when they came back to the states being frugal with one's money lost its appeal. The only way to battle this downturn is to address mentality in consumers and companies as well to get them to start spending again. I may have my ideas on how to do this which will cost much less than $787B, but I'll be more interested to see if what we are doing right now has the desired effect to consumer confidence instead.

My blog below where the full article is located:
http://confdence.co.cc
So what do you guys think?