Tuesday, August 28, 2012

Political Uncertainty as the Economy's Fundamental Problem ... Makes for an Uncertain Future ... What's NORMAL?

We have record low interest rates and are running huge fiscal deficits at the same time, which taken together mean that the U.S. economy is being "stimulated" to the hilt.

Why then do things continue at a crawl economically?

{NOTE: As reported in prior posts today, consumer confidence is at a nine month low and housing prices, while finally bouncing off the bottom, are still 31% below their peak levels in 2006. See today's earlier posts or Consumer Confidence falls to nine-month low and Home Prices Post First Gain in Two Years.}

What's going on? What's the problem? When will things get back to normal?  Good questions, one and all.

But let's ask one more. What will normal be in the future -- will it be the same as it was in the past or will it be replaced by a "new normal?"  In other words, will we choose to have even more big "bribe the middle class government" until we can borrow no more, or will we instead choose more "self reliant live within our means" individual freedom and the more limited  government of the past? The choice is ours.

One well respected economic commentator attributes the current malaise to the enormous amount of political uncertainty. What's really wrong with our economy is appropriately subtitled 'Politics lies at heart of problem:'

"Before you can fix something, you have to know what’s wrong.

Judging by all the attention being paid to utterances by central bankers these days, you would think that monetary policy is the key to fixing our economy. The stock market jumps on days when there’s the slightest hint of ease; it falls when these hopes are dashed.

To ease or not to ease makes for good headlines, but it is totally irrelevant to what ails us. You see, interest rates are not the problem; they’re about as low as they can go.

Lack of liquidity is no issue, either. Reserves are up sharply as the Federal Reserve’s balance sheet has ballooned.

Meanwhile, the banks are reluctant to lend, lots of consumers are trying to pay down their debts — and many firms are actually sitting on a mountain of cash.

Anyway, as I have pointed out before, you can’t push on a string. In other words, you can’t expect easy money alone to stimulate economic activity.

What is more, too much money coursing through the economy can eventually lead to a pickup in the rate of inflation. Therefore, we don’t need QE3 or any other loosening of monetary policy.

What about fiscal policy, you might ask. After all, the emphasis on deficit reduction instead of on job creation is not exactly the prescription most serious economists would recommend to strengthen our fragile economy. Neither is trying to tighten fiscal policy when it should really be loosened.

However, the size of the budget deficit currently being run by the government suggests that there is no lack of stimulus from this sector. Thus this is not the reason for sluggish growth and high unemployment.

For example, business won’t hire because applicants lack the requisite skills, yet they don’t want to train prospective workers because they fear losing them. And consumers are unable to spend until their net worth recovers, but if people don’t spend, business won’t hire, making it difficult for households to straighten their finances.

In addition, the depressed housing market makes it problematic for people to take jobs in another part of the country.

Overseas developments could be playing a role. Europe’s recession is no doubt affecting many exporters, stateside. The strains on the euro are also a factor.

Notwithstanding all these issues, I think the main thing that’s wrong with our economy is partisan politics.

Don’t take my word for it — polls show that Congress has a record-low 5% approval rating. This is less than telemarketers and way below used car salesmen. It is the least productive Congress in over 60 years.

This traces to an inability of both parties to compromise. As far as both sides are concerned, it’s my way or the highway.

As a consequence, two distinctly different views on taxes, spending and the role of government, combined with a close race for the presidency, has led to widespread fears of the unknown.

Business people don’t know what to plan for in the way of taxes, health care, and government contracts, to name the top three worries. The spillback effect is what is harming our economy.

All this could have been avoided if the parties had sought common ground and worked together for the common good. Dare I even say compromise?

That said, what will it take to jolt the pols into cooperating? Why the elections, of course, so don’t forget to vote.

Maybe the next Congress will remember why it was sent to Washington."

Summing Up

He very well may be right. We need to clean up our act as a people and set a clear direction for the future. What we will come to call normal, if you will.

Are we going to look to continue bigger and bigger government and all that entails, or are we going to look within ourselves and all that entails?

We either have to choose more government or more personal responsibility and individual freedom. With more government will come a false sense of security and with more freedom will come a true sense of greater personal reponsibility.

This really is all about saving the middle class --- from ourselves --- and from the politicians as well..

And, most importantly, it's about saving the country we love so future generations can enjoy the abundant freedoms and opportunities that we've enjoyed.

I guess we have good reasons to be lacking confidence at this time. The air is full of uncertainty.

And the lack of clarity about the true meaning of NORMAL is real.

Thanks. Bob.

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