PRESTOPUNDIT -- "It's a team sport, baby!"

It's another "Is it Hayek?" moment, as folks all over the place are independently rediscovering many of the basics of Hayek's account of money and the the boom - bust cycle, and the central role which capital investment plays in that process. This is from The Capital Spectator:

Avoiding Japan's economic slump has been the Federal Reserve's obsession for some time now. We know that because the usual list of speakers from the central bank have been talking up the powers of the printing press on the subject of money supply. And it's more than just talk.

The latest money stock figures confirm what everyone already knows: the Fed's liquidity-injecting machine is pumping out greenbacks at a healthy clip. The M2 measure of money supply climbed a seasonally adjusted annualized rate of 8.4% for the three months through May. That's more than triple the expected growth rate of the GDP for the U.S. this year. In a plan to juice the economy and at the same time fend off any deflationary threats, Greenspan and company are clearly intent on putting more money into circulation than the economy otherwise requires for normal operations.

The assumption is that if the consumer can be induced to spend more, the economy will recover, and all will be right with the world. For much of the post-World War Two era, the assumption has proven itself a practical, though hardly magical strategy. But the economic dynamic of the 21st century to date is nothing if not different from the preceding decades. Front and center is the issue of the consumer. In particular, Joe Sixpack isn't the problem; rather, his employer has stumbled and can't get up.

The capacity utilization for the U.S. is a prime example of what ails the U.S. A measure of how much, or how little, spare capacity resides in the nation's factories, mines and utilities, the capacity utilization rate is a barometer of traditional economic activity. On that score, there is no mystery to the metric's message: business activity is a shadow of its former vigorous self. The latest number from the Fed puts this measure at 74.3%. That's down from nearly 84% three years ago, and additional declines can't be ruled out.

Such bearish trends in the business world convince some to worry that excess capacity is the gremlin harassing the forces of economic revival. Foremost in that camp is Merrill Lynch's Richard Bernstein, who's recently warned that additional interest rate cuts won't do much to promote recovery, and may even be counterproductive. Arguing that the key problem is excess supply, rather than weak demand, Merrill's chief investment strategist says the solution is reducing corporate debt and trimming the glut of unused equipment on the market, both refugees from the previous decade's boom. Loosening credit only makes this job tougher, he posits, because it delays the inevitable restructuring that looms for American companies. The same challenge faces Japan. In fact, the challenge has been front and center in the land of the rising sun for the better part of a decade now, and the nation by most accounts has failed miserably in cleaning up the mess.

Is the U.S. poised to make a similar mistake? Or to quote the Globe and Mail's Mathew Ingram from his piece yesterday, "Is Greenspan reinflating the bubble?"

Posted by Greg Ransom