Economic Outlook: It's Not as Bad as It Seems

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Economic Outlook: It

Fear is by its very nature a transient emotional response.  It can't be otherwise.  It's designed to protect us so that we can quickly avoid predators and other dangers.  Furthermore, all of the hormones and neuro-chemicals involved with fear are disruptive to the biological system.  That's why the fear response is structured to come on fast, do its work, and then fade away into the background once more.

Why is the physiology of fear relevant to the analysis of economic trends?  Because the main stumbling block currently inhibiting a fast economic recovery is fear:

  • Banks are afraid to lend.
  • Corporate leaders are afraid to expand capacity and hire new people.
  • Consumers are hoarding gold and are afraid to spend their money.

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That's why, as Franklin D. Roosevelt said, "The only thing we have to fear is fear itself."

U.S. banks are sitting with more than $1 trillion in excess reserves at the Federal Reserve because they are still too nervous to lend it.  One of the effects is that the "money supply" is stagnant, despite policies that should have expanded it dramatically.  Some small business are suffering a working capital shortage, but even those firms often prefer to limp along rather than try to borrow in uncertain markets.  That's been forcing them to delay hiring and cut back hours for supposedly full-time workers.

At the same time, consumers aren't even trying to borrow more money in most cases.  Consumer debt numbers have been in free-fall for nearly 18 months.  And since the U.S. economy runs on consumer spending, this is a big factor holding back the recovery

Likewise, the trillions held in cash by corporations have largely sat unused.  Again, fear is the reason, not any measurable economic factor.  Notably however, signals are emerging that capital spending could become the lead mover in a rush to recovery.  The shipment of core capital goods rose 1.6 percent last May.  And capital spending was up at an annual rate of 16.5 percent for the months of March, April, and May.  That was the best showing in two decades.  If corporate leaders can overcome their jitters, they could let loose a torrent of cash and send this part of the economy into orbit.  That's the sort of stimulus that would actually work.

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In fact, there is cash everywhere, from Main Street to Wall Street, just waiting to be used...

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