The answer to this question must, of necessity, be provisional. We are, after all, in unprecedented waters, with the central bank having acted -- and continuing to act -- with unparalleled aggressiveness and speed to counteract a financial and banking system collapse, and to avert the normal deflationary and depressionary aftermath. Having said this, and observing the developments to date, our provisional conclusion is: affirmative. The FED has brought to bear its enormous power, essentially its ability to print money and to disburse this money to those great financial institutions in jeopardy. Moreover, the FED has employed to the utmost its power to control short-term interest: in bringing the overnight rate to zero, and forcing the entire range of short-term rates lower, it has compelled a rapidly growing army of investing institutions and individuals to accept risk in order to achieve a livable income and a tolerable rate of return. This, in turn, has produced the huge rally in equities globally, and in low quality bonds as well. This, in turn, has obviated the risk of massive, devastating institutional insolvencies, as those innumerable businesses on the brink have been able to refinance debt coming due, and at much lower rates than would otherwise would have been the case. Finally, in re-widening the spread between short and long rates, following the 4 year narrowing process the FED instituted and maintained from 2003 through 2007, the FED has progressively increased the profitability of plain vanilla bank lending (as well as other lending). Thus, it giveth what it had previously taketh: profitability, liquidity, solvency to the banking system -- or at least to those elements of it which it chose to allow to survive. The U.S. government has also been successful in deterring our major creditors from cashing in their chips. Much of the complaining and worry of said creditors is a function of public relations and political needs. In their heart of hearts, there is little taste in Asia or elsewhere to commit an act of financial hara-kiri. For better or worse, our creditors know that the US is too big to fail, that if they pull the plug on us, they will inevitably join us in the toilet bowl. Truly, the power of the weak is awesome. The economic recovery, in addition to the underpinning of vast quantities of newly printed money and the spur of a zero percent interest rate, is also supported by the collapse in residential real estate prices, in the process of being joined by imploding commercial real estate prices. The recovery from any depression or severe financial contraction is always fostered by cheap asset prices, since these incent those who have preserved their capital during the collapse phase to buy at depressed levels. Finally, we do NOT BELIEVE there is any solid basis for believing that consumer and debtor mindsets have been fundamentally altered by the collapse in real estate prices, the bear market in stocks, high unemployment or scarce and very costly credit. The economic pain has neither been severe enough nor of sufficient duration to produce any fundamental change. Consumers have not borrowed and spent as usual because they have been UNABLE TO OBTAIN NEW CREDIT OR TO SERVICE EXISTING DEBT. There has been no huge change in the attitude toward savings either, vehement assertions by economy bears to the contrary notwithstanding. Once consumers can buy again, they will. Our creditors are, in fact, eager to lend more, provided we can assuage their fears of dollar debasement. This should not prove excessively difficult, as we will only be telling them what they want to hear. Moreover, in order to prevent de facto American default (via dollar debasement) they must extend ADDITIONAL CREDIT. Bottom line: the game resumes. Moneysage 2009 - copyright |
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