It's Over!

Let's see if I have this right. The unemployment rate showed a small downward blip -- from 10.2% to 10% last month and officials declare that it is proof the stimulus is working. We are told that the Fed will now be able to unwind from its zero interest rate, super expansionary policies and redo its balance sheet. If this is what is going on, it is simply not logical. First, the environment is not conducive to investment and real growth. There is too much regime uncertainty -- businesses don't know what the EPA will do if it labels CO2 a danger, they don't know what taxes are coming, they don't know how or if the government will intervene in their activities, and they aren't assured enough of future growth to invest or hire new people. Moreover, the unfunded liabilities of medicare and social security sit on the horizon as a huge black hole.

Au contrair, we are told. The Fed has been infusing money into the system and with all this money around, spending has to go up. And if consumer spending goes up, GDP naturally will because consumption is about 70% of GDP.

The problem with this viewpoint is that banks decided not to lend and now sit on a massive amount of cash. So far in November, banks' excess cash reserves stand at $1,046 billion. This would seem to place the economy on a knife edge. If the economy did grow and the uncertainty was reduced, this amount of liquidity would mean rapid inflation. If the economy is to move upward without inflation, the liquidity will have to have been drawn out of the system, and this means higher interest rates and less lending in the future.

I remain pessimistic about the progress of the economy over the next couple of years.