Jack Nicholson’s character in “ A Few Good Men “ had one of the coolest lines in a movie. It is also strangely apropos in describing our current economy.

We have become accustomed to our economy rolling along at 3-4% GDP growth for a seemingly endless time-span. Then reality hit. To wit, it turns out you can’t:

• allow banks to re-package dog-poop and sell it as gold.

• allow consumers to buy houses, cars, etc. with no income & no down payment.

• allow securities regulators to view their interactions with the regulatees (not sure that’s a word) as job interviews.

• spend beyond your means indefinitely (public & private spending).

• not have monetary & fiscal policy police attempt to prick asset bubbles if they look historically frothy.

We should be thankful that central bankers and federal governments have globally acted to forestall our spiral into worse circumstances. Today we learned that the US pulled out of a recession via a 3.5% GDP growth number for Q3. The expected range was +2.5 to +4.5%. Most estimates were hovering around +3.3%. So +3.5% is a beat. Happy days are here again.

No, they’re not. In order to see a positive GDP number, the government had to do all sorts of extraordinary spending and incenting. $1.4T. That’s what the Fed is buying from Fanny & Freddy in order to keep interest rates low. The 3Q GDP number was +1.9% with autos removed (cash for clunkers). Take the housing credit out, and we’d probably see a continuation of GDP contraction. That kind of government spending is not sustainable.

What concerns me is the overt willingness of the Fed, the Treasury, and the Congress to do “whatever it takes” to get our economy going again. Don’t misunderstand, I fully comprehend that we’re trying to avert a Japan-style situation in the US, but maybe the self preservation moves by consumers and businesses are the right moves:

• consumers are paying down debt and spending less. Repairing their personal balance sheets.

• businesses have cut costs (& jobs), inventories, and have made themselves very lean.

• banks are hoarding money to repair their balance sheets. (and to be ready to buy the fire-sale assets of the hundreds US banks that were not fortunate to be Too Big To Fail + rebuild the empty FDIC coffers)

Paradox of thrift be damned. We should be doing these things (noted above). Not taking these actions re-inflates another bubble and adds systemic risk that may make the past 2 years look rosy in comparison. The solution to our societal debt predicament is not more debt that is government-encouraged.

This brings me to my reference to “You can’t handle the truth.” The truth is that absent historical proportions of federal government largesse, we will see a return to economic contraction and deflation in the US, Europe and Japan. But note, if something cannot continue, it won’t. There is a finite capacity to absorb (buy) sovereign bonds. Be they US Treasuries or otherwise.

We are likely to see the house tax credit extended and possibly even expanded because absent the program, we will plumb new depths in the US housing market this winter that will wreak havoc on consumers, bank balance sheets, and most importantly – on the ability of politicians to get re-elected in 2010 mid-term elections.