How Uncertainty Prolongs the Recession
What will it take to right our economy?
In the past, the recovery was led by IT investment and consumer spending. But this time it seems to be taking a little longer than expected. Why?
A recent letter to the editor in the Wall Street Journal by James Easterlin of Durham NC commenting on Andy Kessler’s “The Yo-Yo Market and You” reminded me about why this nasty recession’s recovery is taking longer than hoped. It’s all about the uncertainty. Uncertainty about industry regulation. Uncertainty about taxes. Uncertainty about healthcare costs. Uncertainty about the cost of capital.
All this uncertainty increases the firms long-term expected cost of capital which means that only the most critical business projects get funded since only they can reach the threshold of return. Ergo, lower capital spending than otherwise might have been undertaken if only the uncertainty didn’t exist.
Investors are also punishing (more like slapping) those CEOs that talk about plans for capacity expansions.
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