The economy is all about confidence. Fear = lack of confidence. Greed = supreme confidence. Individuals feel confident when the stock market and housing prices are up. When individuals feel confident they spend money, and even borrow money, to buy more stuff. Consumer confidence drives the economy. When consumers spend, business do well, stock prices go up, consumers feel more confidence and spend more. Virtuous cycle.
When confidence is down consumers "de-leverage" reduce borrowing, reduce spending, which hurts business, and starts the death spiral. The Fed can lower interest rates to ZERO, but businesses will not borrow or expand because they aren't confident. Conversely, when confidence is high, businesses will borrow no matter what the interest rates (or tax rates) are.
Government can't control the economy anymore. In the old days the Fed could raise interest rates to slow down inflation, or lower interest rates to speed up the economy. It doesn't work anymore because our economy is now global, and interconnected with other global economies. Money and wealth can move globally in seconds with the click of a mouse.
Congress could raise tax rates or lower them to incentivize the economy. They could give special tax incentives (R&D tax credit, solar tax credit, jobs credit) to make certain things happen. It doesn't work anymore. Business got wise to the constantly changing rules and has decided not to play anymore.
Today it is the housing market and the stock market that drives the economy. When housing prices and stock prices are up, people and businesses feel confident...and they spend money...which drives the economy and jobs growth.
When housing and stocks are down people and businesses get nervous, consumers don't spend, businesses don't hire, and everyone gets very conservative. Economic death spiral (Fear) ensues. When this happens lowering interest rates won't help. Raising or lowering tax rates won't help. Political speeches won't help. There are no quick fixes. Economic cycles take time to adjust.
Remember one thing; fear is temporary, greed is permanent. Greed always wins out over fear. Fear = lack of confidence, and is temporary. Greed = supreme confidence. People don't want to miss out on new opportunities or fantastic buys. The economy will come back strong in spite of government policies...not because of them.
Subscribe - To get an automatic feed of all future posts subscribe here, or to receive them via email go here and enter your email address in the box in the right column. You can also follow me on Twitter @dondodge and on Google+
