Pushing on a thread

Bernanke may be the most powerful individual in our economy, but he is powerless when it comes to consumer demand.
That’s unfortunate, because consumer demand is what we need.
QE2’s effect is to make it even cheaper to borrow money. The theory is that lower interest rates will encourage companies to expand and hire.
Athens State University economics prof Bruce Wilkes once told me that it’s tough to push on a thread. To direct a thread, you have to pull it.
His point was that demand, not supply, drives the economy.
Bernanke is stuck trying to manipulate the supply side. He is pushing the thread. Some companies will suck up the cheap loans, but they’ll use it to replace higher interest debt or buy back stock.
What Bernanke wants, of course, is for companies to use the cheap cash to expand and hire. That will not happen until capitalists see demand increasing.
Demand can increase in two ways. Either consumers can increase their spending, or government can do so. Stated differently, government can use tax dollars to increase demand, or consumers/taxpayers can do so voluntarily.
Tuesday’s election eliminates the possibility of more stimulus spending, the government’s only way to “pull the thread.” Bernanke and the Fed can only push the thread.
The economy is improving, so it’s possible consumers will begin pulling the thread voluntarily. That would be a bitter pill for the many unemployed Democratic elected officials, since demand collapsed during a Republican administration and began improving — too late, apparently — under a Democratic administration. But hey, that’s politics.
If Obama’s efforts have not taken hold, though, we’re in trouble. Not just Republicans in 2012, but all of us, and soon.
Bernanke deserves credit for doing the best he can with the available tools, but finally, pushing the thread will not work.
To escape this economic mess, we need increased demand. Absent a resurgence of spending from consumers — unlikely when 10 percent are unemployed and many more expect to be — that requires government spending.
We just put in power a House that has marching orders. Those orders are to CUT spending. Which means aggregate demand will drop.
Our newly elected leaders will soon face an ugly decision. Obey the very specific instructions of those who voted them into office, or save the economy?

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Filed under bailout, Federal Reserve, Recession, Uncategorized

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