Cause for Optimism?January 31, 2008
My writing has been so negative lately, I thought I would try to be positive for a few moments and see how it feels. Let’s assume, for the purpose of this little experiment, that bond insurers are bailed out either by Congress or the Federal Reserve. In one case it’s funded by deficit spending, in the other by inflation. But in either case, there is a short term cost to the general public and the end result is a problem solved. The Federal government also cancels adjustable rate mortgage resets, which doesn’t solve the bankers’ problems, but it is enough to stop intentional foreclosures and spread losses more evenly over the next few years. The banks continue to write off billions of dollars every quarter, but eventually it becomes routine and people stop paying attention. The trade deficit is still extremely high and the US dollar continues to drop, but the cheaper it gets, the more Asian and Arab investors purchase equity in American financial institutions. Ultimately, hundreds of billions of dollars pour back into America and profits from other business units begin to outweigh losses from the sub prime fiasco. Losses at American lenders will continue for a few years, likely causing a recession, but when concern over an insolvent financial industry is eliminated the reduction of fear and uncertainty ends volatility on the stock market, causing business and consumer confidence to stabilize. Expectations of an American recession cause speculation on the commodity markets to turn negative and food prices end their advance. The massive number of new dollars in circulation after the bailout will all ultimately end up being re-invested in the now tantalizingly cheap US equity market and retirement funds will begin to climb again. American companies doing business in China threaten to re-locate their operations if the renminbi appreciates; the Chinese government decides they are willing to absorb losses in their foreign exchange reserves from a depreciated US dollar and hold a new dollar peg to prevent its citizens from becoming too wealthy and threatening the power of the state. Cheap products continue to ship abroad, providing a sufficient cushion for average American consumers to survive the recession without too much difficulty. Real estate prices bottom out when Congress swings open the gates of immigration and millions of immigrants, who unlike Americans have been saving these past few years, race to snap up cheap properties. Tax holidays entice wealthy foreigners to snap up choice vacation homes in California and Florida, the hardest hit markets, and they begin to recover. The government stops threatening illegal immigrants and even the poorest laborers can now afford to pool their savings and buy some foreclosed properties. With order restored, interest rates start to climb causing long term yields to soar and a resurgence of confidence in the US dollar stops its depreciation. Lenders return to the days only qualified consumers had access to credit and over time consumer debt is reduced, as savings increase. Many manufacturing jobs never return, but building a new factory abroad is no longer cost effective and the trend is frozen. As security measures relax, tourism begins to recover creating new opportunities. The massive amount of capital brought to America by millions of immigrants causes the recession to end. Unemployment is a bit higher than today, but a new technology breakthrough in batteries or solar panels creates entirely new industries and the economy begins to grow again. So… despite the many hypotheticals and assumptions in this story, any takers? No related posts.
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Man, I’m with you..I need to think more positive about the current situation though I am cynical as ever. America is in denial about the impending collapse of the dollar. Peter Schiff put is so eloquently.. “America has gone from a nation of savers, producers and investors to a nation of borrowing, gambling and consuming.”
I live in South Korea and I love it here. The central Bank here is not dumb and they know the repercussions of lowering interest rates too much. I’m wondering how the Korean won will hold up with decreasing exports to the U.S. I do think Korea has diversified their currency holdings as well as diversified its export markets. Perhaps this decoupling theory will hold up and Asia and the Middle East will see a huge shift in purchasing power. But I don’t know. The U.S. plays an important role. For a really great analysis of the future of global markets, check out this piece –
http://www.nytimes.com/2008/01/27/magazine/27world-t.html
@Point
“Let’s assume, for the purpose of this little experiment, that bond insurers are bailed out either by Congress or the Federal Reserve. In one case it’s funded by deficit spending, in the other by inflation. But in either case, there is a short term cost to the general public and the end result is a problem solved.”
What you are saying is financial/economic crime is no crime at all? Then let us make counterfeiting legal, all it needs is some color laser printers everybody will be rich in no time, why restrict “benefits” of counterfeiting to people who run the banks?
Economics is zero sum game(every economist would like to hide this fact), the wealth acquired by the bankers and people close to them are lost by someone else…… lot of people will lose their jobs, their wealth because of the financial criminals. Isn’t it Evil?
The bond insurers did not commit any crimes, unless being stupid is a crime. I’m not arguing in favor of a bailout, but this attempt at optimism would require this problem to go away somehow other than massive recession and market collapse.
And economics is not a zero sum game. If everyone does what they do best, everyone gets more of everything.