[quote=UCGal]Brian – I agree that liquidity is part of the problem with the lack of manufacturing and production…. but only a part. The other problem is lack of demand. When the housing bubble burst folks no longer felt as wealthy… so spending slowed. Add higher in employment than before the collapse and you have another factor killing off demand for those manufactured goods. The job market is just barely starting to recover.
As far as toxic assets eventually recovering… not so much with the mortgage backed securities. Foreclosures force a recognition of the loss. If enough houses foreclose that MBS will never be above water. The AIG credit default swaps paid off dollar for dollar to Goldman… those will never be anything but a loss.[/quote]
Agree very much with the demand issue. I’ll go a bit further and say that liquidity is not a problem at all. Look at all the money sloshing around trying to buy up the favored asset class of the day (commodities, currencies, stocks, bonds, real estate, etc. — all up significantly since 2008/2009).
IMHO, the number one problem is solvency, especially the solvency of those who represent the traditional “demand” in the economy. Everyone is up to their eyeballs in debt, and they cannot afford to pay off that debt AND continue sustaining the demand necessary to keep our economy moving. This is the because of our wealth disparity. If all the money is owned by the few at the top who only seek to increase their cash/asset holdings, then the money cannot flow through the economy at the base of the economic pyramid, which is what holds everything else up.
More “liquidity” in the form of debt/credit will not help because credit simply pulls consumption forward, it has an even larger negative effect on future demand because all of that money, plus interest, needs to come back out of economy in order to pay off the debt. This negative effect on future demand is where we are now. They money has already been spent, and it’s now time to pay it back. Liquidity/more debt will not help us to get out of this mess. We need more money (without any debt offset) to be pushed down to the bottom of the pyramid so that the economy can begin moving again. This is why I favor major tax and trade reform so that the destructive trends of the past ~30 years can be reversed.
