Wednesday, October 13, 2010

The Way Forward

The Lehmann Letter (SM)

The last letter began with this question: “What will lift the economy out of the doldrums?”

"Strong demand," is the answer.

But we haven't yet found the source for this much-needed demand.

Household borrowing and spending collapsed when real estate imploded. The federal government tried to make up the difference with its borrowing and spending. Now the government's efforts have become political liabilities. So we can't expect federal expenditures to show the way.

That means we'll have to wait for households to reduce their debts and re-liquefy their balance sheets before consumer spending begins to slowly gain strength.

The front page of today's New York Times carries an article by Michael Powell and Motoko Rich that illustrates the problem:

The first sentence of the ninth paragraph sums it up: "Demand is inert."

We have painted ourselves into a corner and should not expect quick relief.

© 2010 Michael B. Lehmann

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