The fallacy of 'money on the sidelines'

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investorzzo's picture
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The fallacy of 'money on the sidelines'

From the end of 2007 through Q1 of 2009, household equity has declined by 94%. Is it surprising that Friday's GDP number would have been a complete debacle if the consumer had been left alone to prop the U.S. economy, on whom 70% of the economy is reliant? Obama pulled a Hail Mary with the stimulus: without it there would be no debate America is in a depression right now. The only remaining question is how long can the House and Senate extend such subsidy programs as Cash for Clunkers before the rest of the world throws up in America's protectionist face?

The truth is that money market accounts, which currently hold about $3.6 trillion dollars, will not decline much more, as this is the only perceived safe haven for U.S. household capital. The U.S. consumer has seen how volatile the equity market is and is unwilling to transfer substantial amounts of capital from safe to risky investment vehicles. The fact that household equity has declined by 94% is also a very critical concern. And, even if Money Market accounts get depleted and all capital moves to stocks, it is obvious that without Federal backing the market will never even get back to 2007 levels purely as a function of capital flows.

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