Oh boy, the economy. Everybody's writing about it. I have some thoughts which reflect my actions as of late. At the end of '08, it got pretty clear that equities were no place to be. It's not that stocks weren't undervalued (they were, and they still are), but the buyers simply have dried up. I had put in stop losses on all my positions, and my last position got stopped out two weeks ago (GE). So I threw everything into ING savings, except they keep lowering their rates (I think it's down to 2%) which makes it pretty useless. 

The government battled the liquidity crisis and alleviated those issues by pumping in significant amounts of money. But that money isn't being spent - just like me, banks are hoarding it. Even as the Fed continues to get interest rates close to zero (risking what's known as a liquidity trap - a situation that plagued Japan for over a decade), people aren't doing smart things with the money (like investing it).

In a situation like this, monetary policy fails - no matter how much the Fed makes it cheap to borrow money, people either will not borrow it, or will hoard it in short-term/safe securities (hence the negative yield on T-bills at one point!).

Obama and team are smart enough to realize that fiscal stimulus is needed - if consumers won't spend money, then the government will. The idea is they will create demand, thus getting people more used to spending money (the cynic in me also notes this gives govt carte blanche to spend money - never a great idea).

I remember thinking two years ago how silly it was to put money into CDs - the inflation rate of 2% would really cut into your 4% return! Now, I'm convinced that holding money in a 2% savings rate is a better bet, because I'm betting more deflation will occur. This is the exact mentality that's trashing the economy. (Oops)

I read an interesting point today (can't remember the blog, will post the link if I recall it) - that another method for fixing the issue from the monetary side is to convince people that holding cash is worthless, thus inducing people to spend money. One way (and it's already happening) is to drive the yield on anything "safe" to 0% (Treasury Bills, savings, etc.). What'd be even better is to make  you lose money simply by holding it - this is inflation. As the value of each dollar declines (as the govt prints more money), the purchasing power of that dollar diminishes. Unfortunately, even with all the cash the Fed is pumping into the system, there seems to be more deflationary pressure than inflationary pressure.

Since people aren't responding to this (and this is the point the blog made) - it might be good to take Milton Friedman's idea of "helicopter money", where the government would print $2 billion dollars (a drop in the bucket, compared to what they're spending elsewhere) and literally shower money onto people from helicopters. By doing this, people are convinced that cash is absolutely worthless, and will start spending it into investments (real estate, etc.). In a sense, Bush did this with the tax cuts last year, but all we seemed to have done with it was pay down our debts (not a bad thing!).

So this makes me wonder: the government is doing a LOT to kick the economy back, but consumers/businesses are resisting. But what happens when the tide turns? As the billions in dollars flows back to banks and consumers, what happens to equities and the values of investments? I know a V recovery has been largely discounted, but I wonder if the pressure from the fiscal side as well the monetary side eventually causes an explosion of economic growth. Low commodity prices, cheap money, low debt ... if only demand returns ...

P.S. The low mortgage prices have even got *me* thinking about buying - if rates stay low through 2010, I can't imagine I'd pass up the opportunity to lock in those prices - just gotta scrounge together enough of a down payment.