US has a very peculiar habit of moving from crisis to crisis and in between lies the bull market phase. The solution to take the country out of one financial/economic crisis invariably puts it into the other. The very low interest rates in early 2000s to revive the economy out of recession after the dotcom bubble lead to the housing bubble. The problem was too much liquidity chasing too few assets.
The steps presently taken by the US Fed and the Obama government to fight the current slowdown I believe can also lead to another crisis in future. The reason is that the liquidity situation is same as it was in early 2000s.
Same a zero to 0.25 % overnight interest rates range; a level reached in December (and expected to be in this range at-least this year). Fed further reducing the borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds. This unexpected move by Fed yesterday led to a good stock market rally in US yesterday and in Asian markets today.
However one should look at the things in a holistic way. Along with EQUITIES, OTHER ASSETS CLASSES are also rallying…MEANING THAT INVESTORS LOOKOUT FOR SAFE HAVEN IS NOT YET OVER. There is a big buzz that the worst is over, but if we ask a question that if the worst is over why is Fed still announcing new billion dollar packages to revive the economy (in addition to the trillions already announced).
The credit card defaults and pension fund redemption's, etc are the news flow likely to hit the global market and can lead to the last leg of fall.
Thus we are again moving into to a situation where too many dollars or too much of money due to "EASY MONEY" availability. The government is asking the already indebted US citizens to take more debt and spend and grow the economy...
i agree with you that the worst is not yet over..the policies taken by the US govt is the same which they took in 2000...the crux of the problem lies with the apporach of the US govt... u can alwys have high growth rate when the country is heaveliy dependent on imports and the circulation of dollar in the international market...the very fact that US economy has shown consistent downturn since the dotcom bubble shows the falicy of the policy and lack of sustaintabilty of the economy...the volatility in the US economy is also not good for the world economy as this increases uncertainity which in the long run is not good...the only solace comes from the classical bussiness cylce theory that says that bubbles would always be there in the economy ...and our job is to find where exactly it is before it burst...adding on..that since it is a cycle a downtrun in the cycle would be followed by a upturn....thats a positive note in this gloomy economic enviroment...its expected that the situation would not improve before 2010...lets see how the world economy shapes up in the coming few months...but u have raised some very important points...nice writ up...
ReplyDeleteThanks a lot and even I stronly agree with your views
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