Consumer spending doesn't grow the economy. Consumer savings allocates capital to more efficient locations.
What of it? A car doesn't go anywhere without gas. You said yourself that consumer spending drives the economy, but if consumer spending is curtailed (unemployment, people paying down debt), how does capital get efficiently allocated?
Bottom line is all your analysis is tied to that Keynesian concept. At this point you and I are going in circles, you keep stating theories as facts then discounting theories as theories.
Where exactly does my analysis fall apart? It's based on observations that are well-grounded. For example:
- Demand is depressed. My favorite indicator are the business surveys that back up this idea; lack of sales has overtaken even the perennial "I am taxed too much" complaint.
- Excess capacity. We have nearly 8% unemployment. More if you count the part-timers.
- Debt overhang. Look at any household debt chart and see the massive climb as we approach 2008. It is slowly coming down, as people pay down debt.
- Lack of savings. Look at any chart you care to. Savings as a percentage of disposable income has been on a basically steady decline since the 80's, It spiked up during the "oh my god we're all going to die" phase of the financial crisis.
- Significant inflation is not happening. Even if you don't trust the government statistics, it's impossible to hide inflation since prices are public. Non-government organizations are supporting the official statistics. Food and oil prices are a false indicator.
Maybe this means that reality has a Keynesian bias, but I'm following the bread crumbs here. The idea of debt deflation, as I said, is not even Keynesian: that's Irving Fisher, the guy who lost his pants in the Crash of '29. For better or for worse, it appears that he still had a point.
But - we do know what was tried failed to help.
This is the notion that I'd dispute. How does one "know" that it didn't help?
I believe the money printing will eventually trigger serious inflation as an additional cost.
It has been four years since TARP, and the start of the Fed's extraordinary interventions. We've not had runaway inflation yet. Is there some threshold of time passed, upon which it's reasonable to come to the conclusion that increasing the monetary supply does NOT necessarily cause inflation?
We appear to be right in the midst of a pretty good experiment, don't we? If inflation never materializes, and the Fed destroys the excess money once the economy recovers, does this mean that the argument can be settled forever?
Regardless of those first two points, the bailouts enshrine the concept of too big to fail meaning one of these things:
1. the gov't needs to abolish large scale financial institutions (consumers lose b/c they cannot reap economy of scale advantages)
2. the gov't is implicitly backing too big to fail companies like GSE, so we'll get more of it.
I don't agree that someone can look at what happened here, and come to the conclusion that a government takeover of their institution is a good backstop plan. Gov't response was scatter-shot (some died, some lived), and politicians (channeling the taxpayer) demanded all sorts of restrictions and strings attached (for things like compensation), such that everyone and their uncle wanted out as soon as possible.
That seems like a fairly good deterrent to me.