Temporary stimulus causes bleak recovery

The policy of injecting financial stimulus into struggling economies makes sense on a lot of levels; however, it can create a boom-and-bust scenario if it is not properly designated.
There has been a lot of talk in the media lately about a jobless recovery, a prospect that I find both avoidable and worrisome. The problem with stimulus money is that it is short-lived: once the bridges are built and the train tracks laid, the jobs go away. This poses a problem for several reasons.
For one, the kind of optimism that develops from a quarter or two of stimulus-induced declining unemployment gives people the impression that a recovery is in the works. This may be true, but the recovery is certainly not as quick as the stimulus makes it seem. The jobs are coming from unsustainable government funds, not investment from private businesses and households. This inflated sense of security can persuade citizens to spend more aggressively than they would have if not for the sudden turnaround that stimulus seems to create.
Private borrowing is often considered a necessary component of any economic recovery so when things turn sour, central banks lower the interest rate to tempt businesses and households into using borrowed money. When households are once again borrowing, this money gets passed through the economy from the purchaser to the supplier and back to individual households in the form of employment income.
This is about the point in economic recovery the world is currently experiencing. Corporate profits have improved over 2009 and after a few quarters of improved employment, new concerns about long-lasting unemployment are beginning to push to the forefront.
So what’s next? Interest rate increases.
After flooding the economy with cash, the governments of the world are going to have to rein some of it in to prevent widespread inflation. They have no choice but to increase interest rates, how long to wait is the only decision left to make. That decision has already been made by economists everywhere; the consensus answer being sometime in the third quarter of this year.
The rate increase, which will be fast and steep, will force all those households that were convinced to borrow to pay more in interest each month. Some of these households will default; but almost all of them will have to par back spending in order to avoid it. This will plunge nations back into periods of stagnation.
That is what we have to look forward to as a result of stimulus spending targeted towards projects that are temporary in nature.
The argument I am trying to make is that all the stimulus in the world will not pull a country out of recession if it doesn’t do a good enough job of creating permanent employment. It is for this reason that countries should use a recession as an opportunity to start exploring new sources of revenue. Rather that building roads and bridges, which are temporary projects, a country will be much more successful delegating that money towards a new and flourishing industry. Not only does support for emerging industries creating long-term employment, but their success can produce revenue through exports.
Returning to corporate profitability and GDP growth is important but a country cannot expect sustainable recovery to emerge without employment. A jobless recovery is an extremely difficult recovery and will only result in a boom-and-bust cycle of stagnation.