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Dear Mr. Berko: With all the money being dumped into the economy, why is it taking so long for things to turn around? I would have thought that the huge amounts given to industry and individuals would, at least in a couple of months, improve spending, employment and home prices. What are people waiting for? Are they spending this money, or are they saving it?

When will the economy return to where it was? Why are so many people still losing jobs? Why are home prices still falling? Why are big companies reporting lower sales? And how long will it take for employment and home prices to pick up?

L.G.
Elkhart, Ind.

Dear L.G.: The Treasury Department鈥檚 printing press is a powerful force in our economy. An injection of hundreds, even thousands of billions of dollars can add megadoses of adrenalin to rejuvenate our failing economy. Pumping vast sums into the system will revive lost demand, which should ramp up production, create new jobs, accelerate corporate revenues, improve earnings, boost dividend payments, expand the tax base and restore consumer confidence. These billions of greenbacks also should repair balance sheets, strengthen credit markets, mend mortgage markets, reduce toxic-assets stress, revive home prices, renew the lost confidence of our overseas trading partners and return trust to the stock market.

However, the Treasury Department鈥檚 printing press is also one of the most frightening forces in the economy. While it鈥檚 like pulling a bunny out of a hat, even a bunny must be pulled out with care. Too much money will create rampant inflation, reduce the dollar to the value of a peso and inflate wages. Too little money can egregiously prolong the recession, reduce gross domestic product and cause deflation.

If Treasury Secretary Timothy Geithner (with the guidance of Federal Reserve Board Chairman Ben Bernanke) does it right, the banking industry should regain strength, the auto industry could begin to hit on all cylinders, the housing market could prosper and retail sales might perk up. And then strengthening Dow industrial averages would begin to repair the nation鈥檚 401(k)s, independent retirement accounts and pension plans that have lost trillions of dollars in value.

Our current financial mess was several years in the making. A cure, which could be more painful than the disease, cannot happen in a matter of months.

The following illustration should help you understand this delayed reaction and why it could take 18 months or longer to return the economy to health.

Imagine that the Treasury Department is a powerful locomotive pulling 100 freight cars. Now, let each of those freight cars represent a section of our economy: lumber, chemicals, paper, electronics, plastics, automobiles, health care, home building, commercial real estate, etc. Now imagine that Geithner is the locomotive engineer. Visualize that there are train depots representing every business in every U.S. city and that our train is scheduled to make a short financial stop at each depot.

We鈥檝e all seen locomotives, with lines of freight cars linked by hundreds of hard couplings, idling at switch crossings. If you look way down those lines, you will see the cars appear progressively smaller in the distance. So, when Geithner moves the throttle forward, that massive engine transfers power to huge wheels that grudgingly and slowly gain purchase on the track. As the wheels turn, you can hear steel couplings rhythmically 鈥渢hwack.鈥� You can even feel the vibrations of the couplings jolting against other couplings, responding to the brute power of the locomotive. The sequence lasts about 40 seconds, until the coupling of the 100th car confirms the pull of the locomotive. And it takes about 20 minutes until all the cars reach cruising speed and chug into the next station.

Of course, our economy is much larger than a 100-car freight train. While it takes 40 seconds for the 100th car in our example to respond to the pull, it will probably take about six weeks for the first $100 billion to make its way through the train depots of the economy, six weeks for the second $100 billion, six weeks for the third $100 billion, and so on. This is a rough guess, but it could be 18 to 24 months before our economy reaches cruising speed.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 1416, Boca Raton, FL 33429, or e-mail him at [email protected].
漏 Creators Syndicate Inc.