Pushing a Rope

Well, looks like everyone from the president to the Fed's chairman is ready for economic stimulus. There's only one problem, as I heard Robert Reich state well on Marketplace Morning Report. I have my own way of thinking about it. A rope can be a great tool to get something moving, but only if you are pulling on it hard enough. Push, and the mass of fiber collapses.

The problem with current proposals to stimulate the economy is that the people in charge are forgetting this simple yet telling physical experience. To put a few hundred into the hands of many, given the rise in energy and food prices, means that they might almost, but probably not quite, stay where they were. That's just holding the rope, not pulling. The richest part of the populace would have more free capital, but there's only so much they can consume; there are just not enough of them to make a difference.

Trying to get businesses to invest is like pushing the rope. Companies spent 15 to 20 years relearning the lesson that it makes no sense to invest in infrastructure, capacity, and inventory that you don't need. Make the money available, and corporations won't invest money in stimulating ways because for them it is a waste. Instead, they'll look for other places to park the cash that might offer some return.

And to stimulate the economy, the government and the Fed effectively have to loosen the money supply, reducing the value of the dollar and burying the country under the weight of even more debt and unsupported currency. Better we should realize that sometimes you have to wait out unpleasant news rather than get a nasty rope burn trying to finagle your way out of it.