To Whom Did the Economy "Seemed Poised to Finally Strengthen?"

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Thursday, 02 June 2011 05:01

That's what readers of the Washington Post front page article on the economy are asking. Those who know economics saw that house prices were falling and would continue to fall. This decline has eliminated close to $1 trillion in housing wealth since the peak reached last July. It will likely eliminate another $1 trillion by the end of the year. The winding down of the original stimulus package, coupled with state and local government cutbacks, was expected to be another major source of drag on the economy.

The boost provided by the Fed's QE2 policy was generally anticipated to be limited, lowering 10-year Treasury rates by perhaps 20-30 basis points. The net stimulus from the tax cuts was very modest, with the 2 percentage point cut in the Social Security tax providing only marginally more stimulus than the Making Work Pay credit that it replaced.

The problem appears to be the Post relies on experts who are poorly informed about the economy. This is the reason it failed to notify its readers of the dangers created by the growth of the housing bubble. It continues to be a major problem with its economic reporting.

It is also worth noting one other potential source of stimulus not mentioned in this article: a lower valued dollar. A lower dollar would make U.S. goods more competitive in world markets. This would stimulate the economy by reducing imports and increasing exports.

In the longer run it will be necessary to have the dollar fall to bring the trade deficit closer to balance. Until the trade deficit is brought down, then by definition the country must either have a large government deficit or negative private savings, or some combination of the two. This is implied by the fact that the trade deficit is equal to net national savings so that if the country is running a deficit, then the public and/or private sector must have negative savings.