My progressive friends have been used to pooh-poohing any notion of an economic turnaround. Now, a few of them smile a night with dreams of Smithianism dancing in their head.

Brian Beutler reports

There’s some return on capital in the economy — when you build a new building or piece of machinery it has some rate of return,” Smith explained. That potential return is why in normal times people take risks instead of just hoarding cash — it sets what’s known as the “natural rate of interest.” During the recession, that rate actually became negative, leaving people content to let their money idle at zero interest rather than invest it in the economy.

Years later, things need to be replaced, the housing supply becomes inadequate, and demand increases, pushing that rate up. Smith thinks it’s now higher than zero — and barring an external shock, should be enough to usher a recovery.

“Watching the rents rise, watching the used car prices rise, I thought at some point this is going to catch — it’s going to be a self-reinforcing cycle,” Smith said. “Eventually any recession is going to end from this very effect.”

If that happens in the next few months, throw everything you think you know about 2012 out the window. Republicans have one game plan for beating Obama and it rests on voters believing the country’s best days are behind it. They’re now starting to grapple with their options if by mid-year, the unemployment rate is falling fast toward eight percent.

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