Ultra-low interest rates and massive liquidity injections have acted like a painkiller, stabilising the U.S. economy and preventing it from going into shock. But they have not cured the underlying problem of over-extended households and an economy dependent on increasing consumer indebtedness as its main source of growth.
The result is a highly uneven recovery. While many parts of the manufacturing and the service sectors are rebounding strongly, those most dependent on credit, particularly housing and autos, and others associated with them such as home furnishing remain depressed.
Low rates have largely solved the cash flow problem, at least for households that have remained in employment. But household balance sheets are still undergoing what is likely to be a long and painful period of adjustment that will continue to act as a drag on credit-driven spending for several more years.
It is not clear monetary or fiscal policy can help much more in these areas. It was precisely overspending on cars and homes that got U.S. consumers into such a disastrous financial position during the mid and late 2000s.
Households have no real income growth to finance renewed spending on big ticket items and lack the confidence needed to take on much more debt to finance extra consumption. Even if confidence somehow recovered, most lenders remain wary about the poor creditworthiness of potential borrowers and the weak state of their balance sheets.