onsdag 25 mars 2009

Bull or Bear?

Even though I expect the current recession to end relatively soon, the stock market to rally, taking the DOW up to 10 000, and job losses to turn to gains, this only is my short term expectation of economic aggregates. In the longer term, all the policies being taken by the Fed and the Government are bound to seriously damage the ability of the U.S. economy to expand at its potential trend rate of growth for a very long time. You simply cannot solve a problem of excess consumption and debt by more consumption and debt.

The reason why I believe that the economy will end its current recession shortly and embark on yet another expansion is that I judge that the actions taken by policy makers address the [current] fundamental obstacle: the availability of money and credit. Contrary to other pundits, I firmly believe that demand for credit is still there. And if only credit can be extended to consumers, they will once again start to consume over their means, and companies will stop firing, and start hiring.

That will not, however, continue forever, and sometime in the not so distant future, both the demand for credit and also the ability of policy makers to even facilitate its issuance, will shrink severely.

I am of the view that, the most likely scenario for the coming depression, is increasing yields on government debt, taking the cost of servicing it to levels not bearable for the U.S. government, leaving it to two options: either to default or inflate.

Timing will be crucial. The next economic expansion may be very short, perhaps only 1.5 - 2 years. Or it may be 5 years. Who knows? Just keep your eyes on those yields. For they will determine the extent to which the coming expansion goes, and the extent to which the coming depression leaves its chronological footprint.

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