What Could Stop the Downward Slide?
The economy has been in a strong downward slide since mid-summer. As people lose confidence, they stop spending, businesses cut back, people lose their jobs and so on. Each step builds on itself in a brutal downward slide. Financial companies have real problems and are cautious and won't lend. Businesses and consumers won't borrow.
John Maynard Keynes addressed this during the Depression. He called it a liquidity trap and said that in this instance monetary easing was like pushing on a string. An alternative, he felt, was government fiscal stimulus. What this means in plainer language was that if consumers and businesses wouldn't spend, the government would.
That's what we're doing now as the U.S. governments and other governments lay out trillions of dollars. Will this work? No one knows for sure but there's every reason to think that it will. Governments around the world have been throwing money at the problem. It takes time to achieve the desired effects. Given the widespread panic in evidence, it will take many months before we are sure that this is working.
A bad problem has been the timing of the U.S. election. With a lame duck president and so much uncertainty all fall, it has been a difficult period. Businessmen and investors need as much certainty as they can get to make decisions. Moreover, different administrations have differing views of the causes and solutions.
Beyond the government fiscal stimulus, other things should eventually cushion the fall. Unlike in the Depression, there are many government transfer programs that support many millions of Americans. such as Social Security. In addition to which and private pensions and many other savings vehicles were virtually unknown in the 1930s.
Businesses have cut back so dramatically that inventories should be very low by mid-2009 and that could be a trigger for renewed economic activity. In addition, people should be adjusting to the realities of the recession by then and the fear should have passed. In that case, people revert to routine and that should benefit the economy as well.
While we can't know the dimensions of the recession and it could be long and drawn out, the financial markets should begin to recover before then. The stock market has already fallen this year more than in any year since 1931, so it's discounting a lot of bad news. It doesn't mean that the market has necessarily bottomed but it's not ignoring the recession either.
http://en.wikipedia.org/wiki/John_Maynard_KeynesThe economy has been in a strong downward slide since mid-summer. As people lose confidence, they stop spending, businesses cut back, people lose their jobs and so on. Each step builds on itself in a brutal downward slide. Financial companies have real problems and are cautious and won't lend. Businesses and consumers won't borrow.
John Maynard Keynes addressed this during the Depression. He called it a liquidity trap and said that in this instance monetary easing was like pushing on a string. An alternative, he felt, was government fiscal stimulus. What this means in plainer language was that if consumers and businesses wouldn't spend, the government would.
That's what we're doing now as the U.S. governments and other governments lay out trillions of dollars. Will this work? No one knows for sure but there's every reason to think that it will. Governments around the world have been throwing money at the problem. It takes time to achieve the desired effects. Given the widespread panic in evidence, it will take many months before we are sure that this is working.
A bad problem has been the timing of the U.S. election. With a lame duck president and so much uncertainty all fall, it has been a difficult period. Businessmen and investors need as much certainty as they can get to make decisions. Moreover, different administrations have differing views of the causes and solutions.
Beyond the government fiscal stimulus, other things should eventually cushion the fall. Unlike in the Depression, there are many government transfer programs that support many millions of Americans. such as Social Security. In addition to which and private pensions and many other savings vehicles were virtually unknown in the 1930s.
Businesses have cut back so dramatically that inventories should be very low by mid-2009 and that could be a trigger for renewed economic activity. In addition, people should be adjusting to the realities of the recession by then and the fear should have passed. In that case, people revert to routine and that should benefit the economy as well.
While we can't know the dimensions of the recession and it could be long and drawn out, the financial markets should begin to recover before then. The stock market has already fallen this year more than in any year since 1931, so it's discounting a lot of bad news. It doesn't mean that the market has necessarily bottomed but it's not ignoring the recession either.
http://cepa.newschool.edu/het/profiles/keynes.htm
http://www.time.com/time/time100/scientist/profile/keynes.html