Subject: Restarting the economic machine - Igantus - please read - Lets discuss
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>
Date: Thu, 6 Jan 2011 10:55:55 -0500

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By David Ignatius
Wednesday, January 5, 2011

"We have magneto trouble. How, then, can we start up again?" mused  
John Maynard Keynes in December 1930, likening the stagnant economy of  
the Great Depression to a broken generator in an automobile. Fear not,  
he wrote, the car eventually would get rolling again, and "we need not  
assume . . . that motoring is over."

THIS STORY
Restarting the economic machine
Corporate America, paving a downward economic slide
Obama's legacy hinges on the economy
As 2011 begins, many investors are acting as if Keynes's "magneto  
trouble" has been fixed. Stock markets are up as investors feel the  
return of "animal spirits," to use another of Keynes's graphic  
metaphors.

The comments from financial analysts are upbeat, eerily so if you  
remember the recent past. "We see equity markets trading strongly  
through 2011," saidBritain's RBS. "We are in a bull market for sure,"  
enthused John Lekas, a senior portfolio manager for Leader Capital.

But is the economic engine really fixed? As Keynes would have noted,  
that's partly a matter of perception. If investors believe that good  
times are back and start investing on that expectation, a virtuous  
cycle will take over: Growth will accelerate, manufacturers will add  
workers and build plants, unemployment will fall, consumers will spend  
more, and eventually we're back to full prosperity.

Here's how Keynes put it in his essay titled "The Great Slump of  
1930." The economic decline, he said, was "probably a little overdone  
for psychological reasons." The key to a "real recovery," he  
explained, was the return of shared business confidence - "partly by  
lenders becoming ready to lend on easier terms and over a wider  
geographical field, partly by borrowers recovering their good spirits  
and so becoming readier to borrow."

Fed Chairman Ben Bernanke is a good student of Keynesian psychology,  
which helps to clarify his controversial experiment with the monetary  
strategy known as "quantitative easing." His goal was to change  
investors' expectations and thus alter the underlying reality.

By purchasing $600 billion in Treasury securities last fall (and  
thereby flooding the economy with freshly printed cash), Bernanke  
hoped to make money so cheap, and fixed-income yields so low, that  
investors would find it irresistible to buy stocks. As the equity  
markets rose, he hoped, we would see the virtuous cycle of investment  
and job creation.

So far, Bernanke deserves good marks for playing the confidence game.  
"Despite all the consternation over quantitative easing, it was a  
pretty shrewd move, assuming his later exit strategy works," says  
David Smick, a Fed watcher who wrote the prescient book "The World Is  
Curved."

 From the Fed's perspective, here's what has happened since Bernanke  
announced the bond-purchase program last August: The S&P 500 index of  
major stocks is up about 20 percent; the Russell 2000 index is up more  
than 30 percent; stock-market volatility, as measured by the VIX  
index, is down roughly 30 percent.

Beyond these financial measures, there are signs of improvement in the  
real economy. The Institute for Supply Management reported Monday that  
its index of factory activity rose in December for the 17th straight  
month. Sales of automobiles and other consumer durables have been  
increasing. And the banking system finally seems to have steadied.

Here's one striking example of how the system is healing itself.  
According to the Bank for International Settlements, the volume of  
outstanding credit default swaps - the risky instruments that helped  
exacerbate the crisis - has declined by nearly half from its peak of  
$60 trillion in 2007.

What could go wrong with this happy picture? Given that it's composed  
of expectations about the future, almost everything: The economy is  
still fragile and vulnerable to another shock. That's why Bernanke has  
not ruled out purchasing even more Treasury bonds (that is, run the  
printing press a little longer) and why he thinks Congress should pass  
pro-growth fiscal measures to complement the Fed's monetary policy.

The best sign that the economic engine is really repaired would be a  
joint plan by the White House and congressional Republicans to trim  
the federal budget deficit over the next 10 years. The elements of  
such a long-term recovery program are clear: reform and simplification  
of the tax code; cuts in entitlements programs; reduction in military  
spending to reflect a changing strategic environment. There is  
bipartisan support, in principle, for such moves, but in practice?

Keynes put it well at the end of his 1930 essay. He explained that  
political leaders, "like-minded and acting together, could start the  
machine again within a reasonable time; if, that is to say, they were  
energized by a confident conviction as to what was wrong."