It is too late to avoid a depression in the US now. If the steps taken today were taken 12 months ago, right after the collapse of Bear Sterns, there would have been some possibility of an eventual turnaround. But the authorities ignored all the signs of impending economic calamity, dismissed the gigantic and interconnected risk structures of the past era as a market mechanism, and when that mechanism attempted to correct itself, they did not allow it to liquidate the bankrupt sectors. And now, by sustaining the tumour, they ensure that the cancer will do long term damage.

The government and the Federal Reserve are trying to make the American people spend like they were doing in the past, but unlike the past, there’s no credit, no secure jobs, no appreciating asset markets to back their exhortations. In response, Americans are saving like they have not done for quite a while. The dream is that ghe government can make people spend by simply giving them money; a foolish proposition disproven by the decades-long slump of the Japanese economy, and the various stagflationary periods of different nations.

There are two types of economic boom. One is created by expanding money supply and government action. The other is caused by fundamental factors such as technological innovation, or the global spread of productivity-enhancing techniques and tools. The former only creates illusory periods of speculative inflation, and its consequences are destructive, not creative. The latter can also fuel speculative activity, but it’s impact is usually long-term, and positive for the society at large. Our pessimism for the next 5-10 years is due to the fact that there will be a lot more monetary expansion than productivity-driven growth during the period. And the consequences of that will be turmoil, conflict, poverty, and despair.

As the sole remedy, we would be much more optimistic if China could be made to unleash its potential in a healthy manner. But given the attitude of the government, and also the traditions of the China people, we have grave doubts about the credibility of the “China-saves-the-world” scenario.

Yes, the stock market is rallying right now. Commodity markets are also rallying, and even shipping rates have been rising for a while. But we ask the reader to keep our word in mind, and to come back here a while later to check if we have been right or not: these episodes in all these markets are but bouts of volatility, created by the disappearance of the many liquidity-generators. The up-up-up markets of the past were an aberrance, and now we’re back to a normal situation where volatility complicates trading decisions, and economic analyis.That the economy will be in a slump for many years to come is a certainty. How much money the governments will print in their futile endeavour to resurrect a dead banking system in a deflationary environment is uncertain. Consequently, it is not possible to know if the price of a barrel of oil will be 1 USD, 10 USD, 100 USD, or 1000 USD, but until real liquidation and consolidation reshape the global financial system, volatility will remain high, real GDP growth will be low, and ROI in general miserable. We’d willing to bet one million dollars on this conjecture.


The median of Bloomberg’s analyst estimates is that US consumption will shrink by about 1 percent during 2009. To put this in context, this is the first time such a contraction is happening since Pearl Harbour. In other words, no one knows what kind of impact this will have on the global economy, let alone the domestic one.


By now it’s clear to most people that next year will be a nightmare for the US consumer. The Obama administration is planning total spending to the size of 3-4 billion over two years, but that amount is likely to be dwarfed by what the US economy will eventually need to stay afloat. And I doubt that the government will be willing or able to create anything else in this scale over the next few years.


The Federal government’s chosen path is indeed scary, but the danger that state governments and local authorities face is even greater. Unlike the Federal Government, which is still seen as a kind of safe heaven by fearful investors, the local governments are regarded as risky, unstable, partisan entities that can offer little guarantee for asset value during an economic crisis. They are unable to tap the international markets, and in most cases they will not be able to raise taxes to reorder the balance sheets. This will probably add anyother item to the list of federal government bailouts.


But the real danger is that the negative loop will be perpetuated by the continued deterioration of the Us economy. At this stage, all should be done to support the US consumer, but I’m afraid that the exponential deterioration in the status of the US consumer is only following a bubble, and it may therefore be irreversible in the medium term, and unstoppable.