“The present problem is Obama’s record spending- the $1T shovel-ready job that went nowhere and the public sector’s bloated costs caused primarily by unions to say nothing of the entitlement programs”
But that IS consumption. It makes no difference to the bottom line if we spend it or if Obama spends it for us. And the fiscal stimulus didn’t work, did it? That kind of tells me that it isn’t a AD problem, but an AS problem and ultra low interest rates don’t help that.
I think we’re just talking past each other because I am saying almost the same thing Schiff is saying, but in a different way. His basic premise, and that of the Austrian School, is that when the Fed doesn’t let the markets set interest rates, the natural and more efficient allocation of resources cannnot occur.
What I am saying is that we are at least 10 years behind the eight-ball in aggregate supply not only because of Greenspan, but also because of the jacking of the capital reserve ratios in 2001 that lowered the reserve requirements for securities from the GSEs and governments of all levels with a rating of AA or higher to zero. ZERO! And that dramtically lowered the cost of these “investments” compared to those that would have been made in the broader private sector so we can make things and make real money off productive investments, and expand the economic base.
Therefore, in the housing bubble, the final, sought after product was NOT houses, it was the securities behind mortgages that flowed through the GSE clearing houses and gov’t bonds. They were all gravy for the lenders because they needed no reserve for them. What that did was funnel money from pension funds and 401(k)s, etc, and convert it from productive capital into government consumption. And instead of expanding the economic base all those years, all we have is tons of securities and munis that are not worth the paper they are written on. And the opportunity cost to the economy from this is lost supply.
We have been way over stimulated and over consumed. And the traditional view that it’s just “the consumer is out to lunch” is completely wrong. We have huge supply-side issues and the current Fed policy of ultra-low interest rates AND paying interest on reserves is not going to do anything to get us to where we need to be.