eternitus

U.S. Economy: Is the Glass Half Full?

I agree with many of your points... we are going through a healthy correction process that's started to remedy enormous imbalances that had built up over a very long time. Part of our continued prosperity was an illusion brought about by consistently declining interest rates... obviously an unsustainable situation.

Our political system contributed much to our folly. Politicians, most of whom face re-election every two years, are necessarily short sighted. They focus on "making things better now" in downturns but encourage the Fed to let the good times roll during booms. The result has been 25 years in which monetary policy was largely unidirectional... with the Fed dramatically lowering rates to limit downturns and never raising them quite as aggressively to smooth out booms and correct the imbalances caused by their intervention in the markets.

What we are seeing now is the logical conclusion of this 25 year period of declining rates. At rates near zero, we no longer have access to the tool that enabled us to manufacture additional GDP growth and limit recessions through leverage and asset price inflation.

The adjustment process will be painful, but we'll ultimately emerge with a healthier, more balanced economy. Ordinary people will be able to afford ordinary houses (did you ever sit down and try to do the math to see how a $70k family budget could support even a $200,000 mortgage? It's tough) and send their kids to college. Back to the good old factor inputs to generate growth... technology, labor supply and capital!