found this on the CFZ just now...
i would consider the possibility that we have falling demand AND overcapacity..
moneycentral.msn.com
Cashin' In: How rate cuts can delay a recovery
The common wisdom says rate cuts spur economic growth. But by aiding struggling companies, lower rates also can postpone a rebound.
By Art Cashin, UBS PaineWebber
Headline writers and water-cooler economists say the Fed should cut rates to speed the recovery. Conventional wisdom and central-bank policy say rate cuts and easy money restore economic activity.
But sometimes easy money can actually drag out a slowdown.
That happens when the slowdown or recession is caused by something called overcapacity.
Lots of folks think the sluggishness we have today is the result of overcapacity. Slowdowns generally happen for one of two reasons, either falling demand or overcapacity.
In a falloff in demand, people cut back. They buy less and less and companies are stuck with inventory. That doesn't look like today's problem. So far, consumers are doing their share.
An example
To understand overcapacity, maybe we should look at a simple example.
Back in the 1950s, America fell in love with bowling. When there was just one bowling alley in town, the wait for a lane was sometimes two hours, longer than at a trendy New York restaurant.
Then someone built a new bowling alley across town and the wait dropped to 15 minutes. Then a third guy built a bowling alley and there was no waiting line. In fact, each place had five empty lanes each night. None of the three was now making money.
They paid the staff. They paid the mortgage. They lost money and crossed their fingers that things would get better.
In classic capitalism, the guy with the highest costs would soon go out of business, which would leave the other two to return to profitability and a dull but steady business.
Trying to hold on
But, if money is cheap and easy, the weak performer can try to hold on for a few more months or years, living on hope and cheap money.
And through all that time, with too much capacity, all three bowling operations lose money.
They might even try the bowling equivalent of zero-percent financing. They rent you the shoes for nothing, cutting profits further.
That's part of what's happening in Japan, where there are too many companies and too few profits.
And this also is why traders worry about the effect of easy money, at least sometimes. |
