I think you are right that uncertainty is the driving factor here. The banks, investors and most importantly, consumers, are sitting on their dollars. With consumer savings now above 6% and with another point or two will be at savings rates of the 50s and 60s, there’s no place to put investment dollars. Since 70% of our economy is domestic consumer spending, that is a big deal.
This translates into a demand problem. The supply is ample as the Fed has dumped trillions into bank reserves and buying up bonds. The factories and manufacturing capacity is there but just sitting idle. Under normal circumstances, we should have inflation through the roof. But being monetarily at the zero bound, that’s not going to happen anytime soon. It’s a liquidity trap.
So the supply side is ready to go, there’s plenty in dollars and manufacturing capacity to kick start things. The problem I think, and yes I know this sounds Keynesian, is demand. No one is buying. So long as no one is buying the surplus goods inventories, housing, exports, etc, manufacturing will be idle and banks have no place to put money other than treasuries. And this is global, not just us.
Lastly, unless the republicans gain veto proof majorities in the House and Senate, the fall elections aren’t going to solve the economic problems. With the veto pen, they will be able to get at most, half measures. Depends on whether Obama will be stubborn or more flexible like Clinton was after 94, economically speaking. I think we will be in this uncertainty until 2012, assuming big congressional wins AND the White House in 2012.
It’s not “uncertainty.”
It’s debt.
Debt is deflationary. Japan has showed us that fact every year since 1989.
Debt is also addictive. The addicts swear that it will do what it can’t: cause inflation. Addicts lie.
Governments must deleverage away from debt to break the deflationary death sprial...and *THAT* would mean harsh short-term pain before the Recovery began.
I don’t think it’s a liquidity trap - there’s plenty of money sloshing around. Banks have tons of money and they’re probably parking it in treasuries. That’s why interest on treasuries is so low.
I believe it’s more a credit crunch. You constantly hear of small businesses complaining about not being able to get a loan. And I have personal experience as to how difficult it is for a real estate investor to get a loan. And yet you see ads from banks offering loans at the lowest interest rates in history.
So how does one explain this seeming contradiction? My theory is that the reasons more loans aren’t being made is because the qualifications for a loan have become much more stringent (probably what they should have been all along) - taking millions of people and thousands of business out of the game.
It’s going to take a while for the economy to adjust to these new “settings” and find its new “equilibrium”.
I don’t know how much of this new “qualification requirements” are dictated by the fed and how many are the banks themselves. Maybe that is one area where the fed could to do some “easing” while still being mindful of not going back to the bad old days of giving a loan if you fogged a mirror.
Ironically, financial experts from almost every point along the Economic Theory spectrum have been screaming at Americans to save money and not spend so much (I keep 6 months' gross income in a CD that has no early liquidation penalty -- it don't make much but a little is better than a poke in the eye with a sharp stick).
But clearly, this is not what they had in mind...
Agreed. Think no one is buying because we’ve a Congress run by the party of Charlatans and Thieves, coupled with the Manchurian President. We really need a functioning check and balance system. If the party of Responsibility takes over, things might improve somewhat, but the all-clear won’t occur until the Null Set is gone.