Don't ask me why, but I'm getting a weird feeling we may be having an effect on slowing the downspiraling economy. Maybe hurling trillion of dollars at the problem isn't completely futile.
So, allow me one giddy moment of lessened pessimism to speculate on what a recovery might look like.
To being with, there will be all these dollars out there earning virtually zero unless banks can get them to spenders or businesses to invest. Moreover, with the sophistication of markets these days, several eyes are likely to recognize (or think they do, anyway) some sort of bottom and start shifting unproductive funds into stocks at fire-sale prices. I think this is closer than most think.
This is somewhat similar to the spate fo money the Fed unleashed after the dot-com bubble burst. So if billions then inflated real estate over the top, what could trillions now do to other assets?
There’s always a danger the Fed and Treasury may go too far, setting the stage for a big rise in inflation or another asset bubble down the road as the economy revs up and investors get back their nerve. That’s what happened in the early part of the decade as ultra-easy Fed policy and Treasury tax cuts helped fuel a credit boom since gone bust.
Bernanke and Paulson might welcome a bit of that exuberance right now -- even at the risk of higher inflation later -- as they try to prevent the biggest credit catastrophe in decades from sending the economy into a deflationary nosedive.
“It’s true that, over the long run, too much money creates inflation,” says Lyle Gramley, a former Fed governor now at the Stanford Group Co. in Washington. “But they’re trying to keep the economy from going over the precipice and into the abyss.” [More]
I know, I've been looking for an inflationary blowback for months now, but as the momentum grows for huge intervention and the mood brightens a teensy bit (warranted or not) because of a new set of players, the idea of a relatively brisk recovery is not out of the question.
But it will be a changed consumer population out there. And changed business leadership as well. For example, when it finally looks safe to go in the equity water, what stocks would you buy? I think investors who need to plump up devastated retirement accounts will be forced to move out of cash and conservative equivalents simply because the yield will be negative in real terms. But then what?
I'd buy stuff like Fannie Mae and Citigroup. Why? Because they are obviously quasi-government guaranteed and cheaper than Chinese DVD's. This extraordinary process of the last few months has added an odd premium to insitutions and corporations which were badly run but among the chosen to be saved. Foruntes could be made by those who get in early.
I think the savings rate will continue to rise, even with a recovery. We've scared a bunch of citizens with this loss of trillions of wealth. And too many Boomers no longer have enough to retire, so they will be socking it away for some time to come.
Would consumer spending roar back? Perhaps, but much more slowly with the exception of housing, I'd guess. In places like California, this could be the chance of a lifetime to buy a home at a reasonable price, and many programs to enable first-timers to do so will be part of the recovery packages.
But even as individuals respond cautiously as a whole, my guess is policymakers will not let up on the pump-priming until some clear momentum is seen. That means, tolerating price increases (inflation) for some time before tightening credit by raising rates.
``The path of least resistance may be for the Fed to first communicate to the markets that the nature of the current economic woes should keep rates low for an extended period,'' Feroli said. [More]
I think this is very likely. We are seeing deflation up close, and it's pretty scary. Less so than a little inflation right now. I'm still trying to figure out what all those trillions of $ we've inserted will mean as they roam around like a bufflo herd across the world economy. And always remember inflation devalues the huge debt we are accruing.
So, a wild guess from an amateur economist: the economy stabilizes faster than currently predicted, inflation picks up, but in a different pattern than before as consumer spending is altered, and very low borrowing costs for a period of years. The US will lead out the global recession and do so into a period of surprisingly steady growth.