Posted by Kromey at 11:51pm Mar 9 '09I heard this commentary on the radio this morning. It makes perfect sense, and is wholly true so far as I can tell (although I take exception to his valuation of 'M' as part of a growing economy). It's all a matter of perspective, and keeping that perspective focused on the negative will ensure that we keep moving in a negative direction.
Okay. Let me put on my weather-beaten economist's hat again and try to explain something important.
As we all know, we are in a recession that is bad and getting worse. So, basic question: How do we get out of it?
Well, look at it this way. The economy grows because of two factors: M, which is the quantity of money in the economy, which is controlled mostly by the Federal Reserve; and V, the velocity of money, or the rate at which it changes hands - or, as one might say, the speed with which it is borrowed, invested and spent.
Mr. Ben Bernanke, head of the Federal Reserve, has been doing a fine job of keeping the supply of money pumped up. Score one for him.
But the velocity of money has slowed dramatically.
People at every level are afraid to spend because they fear conditions will get worse and they're going to need the money in the future just to survive. So they don't spend it.
One of the big contributors to fear is the big goombahs in the society saying how bad things are. When Mr. Obama or his economists tell us how terrible things are and how they're going to get worse, they're shooting fear into the economic bloodstream, and that hurts velocity and kills stocks.
Notice that recently Ben Bernanke said the recession might end this year, and the stock market rocketed up that day.
What we need, as Bill Clinton aptly pointed out recently, is more cheerleading and less fear-mongering. We elected Mr. Obama to be National Spirit Leader, not National Scary Storyteller.
If Mr. Obama and Mr. Geithner, his Treasury Secretary, and Mr. Volcker, his well-respected advisor, and some real superstars like Warren Buffett and Jack Welch all came out and said, "The recession will end within 12 months. We are sure of it," the recession WOULD end within 12 months.
It's all about confidence, and the confidence of the heavy-hitters means a lot.
After all, no one is bombing our cities right now or poisoning our rivers. This whole thing is about confidence. Ninety-two percent of us are still employed. Roughly 90+ percent are not behind on our mortgages. If we had some confidence, we could get this ball rolling again.
Let's roll!
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