Or sometimes they deleverage instead. We don’t have any more debt to pay off, but we’re building cash right now. My cousin has aggressively worked to pay off a mortgage, despite low interest rates. I’ve heard this story from a dozen different people, none of them asset managers. I think you underestimate the degree to which uncertainty dampens demand.

I don’t think you will have any success in kickstarting aggregate demand until you cure the uncertainty and mistrust in the future. You can pour money into the system as fast as you like and it will drain right back out. Look at public/private debt ratios. The private sector can deleverage faster and farther than the federal government can possibly borrow.

Solve the lack of consumer confidence and you might have an answer. Until then you are trying to fill a bathtub with the drain wide open. May seem like you are making progress, but it is short-lived.

P.S. I’m confused why you think I’m worried about portfolio returns? My portfolio is fine, it is the economy that sucks.

P.P.S. You are an economist, right? Is this the definition of “liquidity trap”? How do our highly educated economists propose to cure a liquidity trap?

What corporate financial planning folks makes business investment decisions based on the governmental budget situation? They build capacity if customers are buying. Customers buy when they have jobs. I’d like to hear a realistic alternative to that view from actual capital allocation decision makers (i.e. not financial asset managers)

“Nobody wants long-term investments. Is this what we want to continue?”

Is there some shortage of investment capital that I’m not aware of? Don’t blame the supply side, blame the demand side.

You seem to be more interested in the interest rate than in the unemployment rate.

Are we to try to engineer an economic environment that reduces the long-term, devastating unemployment problem by kickstarting aggregate demand which leads to jobs, or is the goal of policy makers to provide a certain return to providers of capital?

Solve the reason why companies don’t want to invest – lack of consumer demand driven by high unemployment – and you’ll solve the reason why portfolio returns are so low.

Moreover, as we’ve seen the last couple years, it generates planning confusion. Nobody knows what the fiscal situation will be like in six months. We’re pretty certain that further short-term measures will be enacted, but we have no idea what they will be. So we’ll wait until they pass before making any decisions — and by then the negotiations over the next round of short-term measures will have begun, so we’ll wait again.

If you want individuals and businesses to plan for the long-term, then you need to put some long-term rules into place. It almost doesn’t matter what those rules are — could be austerity, spend-into-oblivion, tax-the-wealthy, tax-the-poor, or any combination of the above. But without long-term rules you simply cannot formulate long-term plans.

Short-term planning forces the money into short-term instruments. Cash. Right now, everybody wants cash. Nobody wants long-term investments. Is this what we want to continue?

“[The President’s] top priority going forward is a tax increase…”

That’s not his “top priority”, it’s just something that isn’t negotiable. It’s a show-stopper, and Barro is taking the stance that the right fringe is – only cutting spending will save the nation. Yet spending cuts will be more damaging to the economy than a tax increase on the top 2%, as that increase wouldn’t decrease spending or investment by those 2%.

I don’t know if the right actually believes everything they say about cutting taxes and economic growth, but if the savings from tax cuts are not poured back into the economy via increasing consumption or investment, then the tax cuts do no benefit, and only serve to increase the deficit. Which is why Obama says it’s all about math.

I know, math is for elitists.