How the US is 'pushing on a string'

JM Keynes called it 'pushing on a string' when an economy is unresponsive to traditional monetary stimulation. Could this be the case for the US as it faces a slowdown?

As both the most technologically intensive economy in the world and its largest consumer, the US has carried the burden of global growth for the past fifteen years. The trouble is that the US is still living with the legacy of this spending spree and continues to grapple with a secular investment overhang in the form of unused manufacturing capacity and a personal spending overhang reflected in a negative savings ratio.

Last week (see: How will the US housing slump affect stocks?) we pointed out that, in the US, a decline in consumer spending would go hand in hand with a decline in business investment. These overhangs are largely to blame for making the US economy generally unresponsive to traditional monetary stimulation when the forthcoming slow down gets underway in earnest. This is what Keynes meant by the phrase "Pushing on a string". Note, however, that the rest of the world, particularly Japan and Europe, did not participate in the 1990's spending spree to anything like the same extent. As a result they do not face the same degree of overhang. As a consequence economic recovery in these regions should follow a more normal course, albeit at a tentative pace.

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