Boy I must sound like a drone at this point but I am still awaiting the pickup in economic activity. As you can see from the chart below, interest rates are stuck in a range and have been over the past year.
The Federal Reserve continues its policy of easier money because it continues to have some worries about current economic strength (or lack thereof). Ben Bernanke did recently indicate that the Fed might start to slow some of this stimulus but it remains to be seen if the economy is ready to get off its training wheels.
In the rest of the world we are seeing weakness. I think some of this is due to the policy differences going on. While some leadership is moving forward with austerity measures (such as countries like Poland) others in Western Europe feel that austerity is the wrong move and are trying to move in a different direction.
This is no different in the United States as some want more U.S. stimulus while others wants cuts in spending. In traditional Neo Keynesian philosophy, difficult economic times would require more stimulus. Therefore no spending cuts and no tax increases. In this environment Democrats want no spending cuts but tax increases and Republicans want no tax increases but spending cuts. So there you have it.
My take on this is pretty basic. Short term stimulus - no problem. But when you build it into longer term programs to form a crutch for the economy that can have bad long term affects.
Secondly, you can't make the high level academic argument that spending and debt doesn't matter to the government because it can just print money. Sane people understand how debt and spending affects their own household budgets and, try as the policy makers might, people are likely to be unconvinced by the "unlimited spending" argument.
As a result, these people will start to behave differently - spend less, save more, become slightly more defensive - which will affect GDP because they will likely consume less than the model presumes. And this spending goes for business as well as individuals.
So back to the fundamental front. I believe at some point there will be more of a pickup in demand which will be good for the economy. But I don't see it yet, and I think some of the discomfort is being caused by policy inconsistency. Part of me will get more bullish if I see the government start to back quietly out of the room and allow the economy to move on its own.
