A Long Time Ago in an a Economy Far Far Away
My apologies for the less frequent posts it what may seem the most interesting period of this site. You can be assured that we are now exactly where this blog speculated we would be in August 2004. The Great Recession is well underway, this is no false start. I read on the front page of the Australian Financial Review yesterday, the phrase “not since the Great Depression”, I suspect will sadly become more commonplace in usage.
As the Great Recession unfolds you will read a lot of commentators writing about how the recession began with the debt crisis in Quarter 3, 2007. Economic catastrophes like the one we are witnessing didn’t begin a year ago. They began a decade ago. The recession we are witnessing now is the final culmination of the dotcom mania of the 1990’s. Back in 2001/02 following the NASDAQ collapse we were in a mini-recession . It was a timely and necessary recession to purge financial markets of the excesses of the internet mania that had gripped the world in the immediately preceding years. Unfortunately this recession wasn’t allowed to transpire. I say unfortunately because in a free economy sometimes markets get it wrong and a correction with its associated consequences becomes necessary. That market was the NASDAQ. To avoid an imminent recession and possibly the political consequences for the new US government, the US Federal Reserve decided to monetise the problem away. By dropping interest rates to 1% the Fed effectively delayed and amplified the problem. Over the next six years the excess liquidity in the global financial system became massive excess liquidity.
This expanding sea of liquidity migrated from the NASDAQ to US property markets creating an incomprehensible boom of rapidly rising property prices, reckless lending standards, billowing personal debt, fraud and complicity. Almost every asset class over the last five years has seen tremendous increasing in values, in no small part driven but the almost unlimited amount of leverage available to finance them.
The sub-prime meltdown was the first step in markets recognising the unsustainable nature of this irresponsible lending frenzy and asset price appreciation. It commenced a process that will ultimately prove cathartic for the world economy.
What lays ahead? Within three years the following are possible:
· personal debt, even mortgages, will be hard to come by to average earners
· stock markets indices will be below half of their 2007 peaks,
· gold will trade over USD 2,500/oz,
· the US unemployment rate will be into double digits.
No doubt this economic upheaval will begin to create geopolitical instability. If the Chinese economy collapses as a result of a massive US induced global recession it may not survive in its current form or as a unified state.
As the Great Recession unfolds you will read a lot of commentators writing about how the recession began with the debt crisis in Quarter 3, 2007. Economic catastrophes like the one we are witnessing didn’t begin a year ago. They began a decade ago. The recession we are witnessing now is the final culmination of the dotcom mania of the 1990’s. Back in 2001/02 following the NASDAQ collapse we were in a mini-recession . It was a timely and necessary recession to purge financial markets of the excesses of the internet mania that had gripped the world in the immediately preceding years. Unfortunately this recession wasn’t allowed to transpire. I say unfortunately because in a free economy sometimes markets get it wrong and a correction with its associated consequences becomes necessary. That market was the NASDAQ. To avoid an imminent recession and possibly the political consequences for the new US government, the US Federal Reserve decided to monetise the problem away. By dropping interest rates to 1% the Fed effectively delayed and amplified the problem. Over the next six years the excess liquidity in the global financial system became massive excess liquidity.
This expanding sea of liquidity migrated from the NASDAQ to US property markets creating an incomprehensible boom of rapidly rising property prices, reckless lending standards, billowing personal debt, fraud and complicity. Almost every asset class over the last five years has seen tremendous increasing in values, in no small part driven but the almost unlimited amount of leverage available to finance them.
The sub-prime meltdown was the first step in markets recognising the unsustainable nature of this irresponsible lending frenzy and asset price appreciation. It commenced a process that will ultimately prove cathartic for the world economy.
What lays ahead? Within three years the following are possible:
· personal debt, even mortgages, will be hard to come by to average earners
· stock markets indices will be below half of their 2007 peaks,
· gold will trade over USD 2,500/oz,
· the US unemployment rate will be into double digits.
No doubt this economic upheaval will begin to create geopolitical instability. If the Chinese economy collapses as a result of a massive US induced global recession it may not survive in its current form or as a unified state.
posted by Peter at 1:33 pm
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