I read a very interesting letter to editor by Professor Eileen Appelbaum today. She argued that we cannot rely on the inventory cycle to lead us to recovery. She argued in the past we may have been able to rely on inventory cycle because increased demand caused by public and private demand would increase output and employment but not this time:
Unfortunately, this time around, things are likely to be very different. The US no longer manufactures most of the goods it needs to replace liquidated inventories, so will need to turn to imports to restock its shelves. Any gains from a rebound in inventories will be largely offset by the negative effects on gross domestic product from an increase in imports.
Prof. Appelbaum believes that our large and unsustainable trade deficit will thwart any recovery. She raises a very interesting point and something that we may be overlooking. What do you think?