More Perspective on the Crisis

Posted by: Ben Steverman on November 26, 2008

Here are several interesting notes that came across my desk in the last 24 hours. (Sorry no links — the full notes aren’t available online.) They concern topic number one for investors these days: the economic crisis and governments’ response to it.

John Ryding and Conrad DeQuadros of RDQ Economics on the latest round of economic data:

We are tired of writing today that this is the weakest reading since sometime in the early 1980s, but this is broadly true of jobless claims, consumer sentiment, manufacturing activity, and home sales today. No doubt we will be writing this about the decline in GDP in the fourth quarter when the data are released in January.

The economics team at Deutsche Bank (DB) thinks worries about deflation are overblown, especially given the efforts of governments to flood the economy with cheap money and stimulus. However, they warn that the result of this aggressive government response could be higher levels of public debt and inflation in the future.

Societies are likely to be willing to take the risk of higher inflation in the longer-term if this reduces the risk of deflation and depression at present. Central banks will not be able to operate against such strong social preferences.

Central bankers might like to fight inflation after the crisis ends, but they’ll be limited by the huge levels of national debt the crisis created.

Brian Gardner of Keefe, Bruyette & Woods (KBW) assessed the impact of the latest announcements from the outgoing Bush administration:

Yesterday, President Bush signaled that more inventions could be on the way and Sec. Paulson reiterated that message this morning and we think that could help calm the markets for the rest of the transition period before the Obama administration takes office.

Ed Yardeni of Yardeni Research:

I no longer believe that Muddling Through is a viable economic scenario. It’s either going to be a very long and deep recession (a.k.a., a depression) or a V-shaped recovery. Washington’s policymakers have been behind the curve, as the saying goes. Now there is some reason to believe that they might get ahead of it.

Here is more on Washington’s latest efforts.

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Reader Comments

Alexandra

November 27, 2008 06:20 PM

The economy contracts for a reason: this time, too much buying--with IOUs instead of cash. That kind of buying sets up a false situation in which the sellers are counting money now that really is not there, that will have to be produced in the future. So the economy has one foot in the present and one foot in the future. If the government throws more cash into the mix, the consumer thinks he has more money again. Let's face it: we don't have the money. We just don't have the money. Our economy is not as big as it looks, and it is trying to "right-size."

June

November 30, 2008 05:29 PM

I hope the experts will get around to explaining these three things to the public:

1. Whatever happened to the Constitution, and is all this nationalization constitutional.

2. And why the experts ignore the fact that until consumers have money to spend the wheels of the economy will remain stuck very, very tight. If it's true, as we're told, that the biggest part of GDP by far is attributable to consumer spending, isn't the solution obvious? Give a trillion, if that's what it takes--not a little but trillions--to the consumers directly. It would "trickle up"--to manufacturers, banks, car makers, retailers and everything else. Of course it would. Not just a little like before but enough that consumers wouldn't merely pay off credit cards. Where is the error in this thinking? But not to buy votes and not to play do-gooder or help "the poor" because the poor cannot be helped, but because of what it would do DIRECTLY for the ECONOMY--and fast! As far as I am aware, it would also be constitutional, unlike when Paulson and company enrich corporate good-buddies at taxpayer expense. Jobs programs two years down the road, etc., are pretty dumb too. No, think of this very January and February and how little buying there will be without an enormous tax rebate. This is the engine of this economy--this: money in the hands of ordinary Americans.

3. We're told we have to keep such and such from failing or it takes the whole structure with it. In what sense is this not true of the consumer? Isn't consumer purchasing the one thing above all that absolutely cannot be allowed to fail?

I get the impression our so-called leaders join Marie in the attitude "let them eat cake." Sorry but we've run out of cake. Shucks, hate to disappoint you, Mr. Paulson.

Forex scalping

December 1, 2008 06:17 AM

We have just blown up our economy and it seems to be much bigger then it is really. That is the only problem.

mahendra

December 8, 2008 11:32 AM

I agree with you.Mere pumping of cheap money into system will not revamp the whole system itself.We will have more inflations to see and also times are ahead when we will see the tragedy of recession after injection of cheap money.

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Businessweek’s Emily Thornton, Amy Feldman, Ben Levisohn, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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