FOR MONTHS NOW, the Federal Reserve and the White House have been opening one economic valve after another - unleashing a river of liquidity. But the U.S. economy continues to dip toward a dangerous deflationary drain.
And should the economy tumble into that sinkhole, officials have fewer valves left to open - particularly after this year's highly unusual, triple liquidity play:
With striking candor, the Bush administration endorsed the U.S. dollar's sharp drop against other major currencies. It's now down 20 percent, and the hope is this will stimulate exports and America's moribund manufacturing sector.
The administration also pushed through the third-largest tax cut in history, with the first pay-offs - checks of $400 per child - soon arriving in mailboxes. These cuts mostly help the well-off, but the hope is they will shore up consumer spending.
On Wednesday, the Federal Reserve cut the federal funds rate for the 13th time since January 2001. With its fall from 6.5 percent to 1 percent - the lowest since 1958 - the hope is this will keep at bay a deflationary quagmire.
Rate cuts haven't done the trick so far, as even the Fed acknowledges deflation's upside-down world - falling prices, wages, demand, production, investment and lending - remains a real risk, one harder to fend off as short-term rates approach zero. The Fed has talked of buying long-term bonds to push down those rates, but economists exhibit troubling uncertainty over whether such aggressive measures would work.
This is a big war - the forces of liquidity vs. global pressures toward zero or negative rates - a war in which everyone plays at least a tiny role. Indeed, for the last few years, the U.S. economy has been sustained by millions of consumers spending too much of their rising home values.
But that hasn't lowered U.S. unemployment - at 6.1 percent, the highest in nine years - or sparked economic growth. First-quarter growth data came in at 1.4 percent yesterday, lower than expected and short of the 3.5 percent that's the hope for the last half of this year. And orders for durable goods, a major manufacturing measure, fell another 0.3 percent last month after a 2.4 percent drop in April.
It's hard to imagine where the U.S. economy would be without all the liquidity infusions so far, but at the same time it remains in critical condition, perhaps just one major shock away from another downturn - and deflation. The rate cuts have enabled consumers to do their part, but the Fed is running out of that ammunition.
The key factor now is business investment. If it picks up, that would signal renewed corporate confidence, an upswing in production, and possibly even a slowing of the job losses. If not, watch out for the drain.