Originally Posted by
Gooch
The end of credit cycle as we knew it has led to a global balance sheet recession and demand destruction. Rather than profit maximization and consumption being the motives driving the animal spirits, they have been replaced by capital preservation and deleveraging, hence the "balance sheet" driven recession.
In order to prevent the economy, domestic and international, from falling into a depression, the Federal Reserve and central banks around the world engaged in a mission of quantitative easing which involved essentially taking interest rates down to zero (or if not zero, solidly below the rate of inflation so that on a net basis it is zero or negative), providing a steep yield curve, currency devaluations, providing backstops for plummeting asset values (also preventing more write-downs) via implicit or explicit guarantees, direct access to cheap and plentiful funding, and more liquidity via the steroid fueled printing and creation of money. Anchored firmly in their Keynesian economic beliefs, they sought to replace the destroyed private sector demand with government demand/consumption and restore confidence to the markets so they became the buyers of last resort, propping up sectors via govt-created demand in mortgages, toxic assets, and treasuries, in some cases directly setting a floor on asset values and in others by providing guarantees which reduce the risk profile of various assets in the eyes of private and global investors, cajoling their participation.
Their fear was a depression, where the psychological devastation that would occur (as seen by those who lived in the late 1920s onward) would impact the population for generations, solidly stunting economic growth prospects for decades, possibly the death of the post-war economic system (Bretton Woods II), and potentially social unrest, which is the worst fear of any government wishing to maintain its platform of power. The central banks felt that extending the duration of the pain and amortizing it at their determined (and tweakable) rate would be the lesser of the two evils, they chose a prolonged recession over a depression with the hope that it would not be a double-dip recession. The virtues of their choice are debatable, but this is essentially what they did. Committed to battling deflation, central banks willingly risk hyperinflation in their efforts to flush the economy with printed currency in order to allow for the asset reinflation we've seen in areas such as the equity markets, commodity prices, pension and retirement funds, loan values, property values, and so on, all of which restore confidence, though of diluted value.
Inflation cannot occur without more money actually being deployed in the economy, the velocity and multiplier effects. However, neither can a recovery. But before this velocity and multiplication will genuinely occur, it seems the deleveraging and re-capitalization that needs to occur take place, allowing for a progression towards an economic recovery driven by sustainable job creation, restored confidence and demand, stable and solid political leadership, and clear continued growth prospects. Leading up to this point, central banks will seek to tighten policy and remove excess liquidity from the markets at an appropriate pace that simultaneously won't derail the progress made yet effectively prevent over- or hyperinflation. Some have been able to start already (Australia has hiked rates three times and look do so for a fourth), some are in the early stages of tightening (very moderate, i.e. U.S. with end of treasury purchases, MBS purchases, discount rate hikes) while some seek further tightening but struggle with balancing the degree (China, reserve requirement hikes, reduced lending, currency appreciation). There are some still uncertain if tightening can begin or if more easing is required such as the United Kingdom. There are some who cannot further ease due to fears or inflation (Europe), treaty restrictions (Europe), loss of competitive advantage (China), or fears of triggering a double-dip recession (everybody).
The excessive debts for the most part have now been transferred from the private sector to the governments. Sovereign risk is now at the forefront. Sovereign defaults or near death encounters have already been seen from Iceland to Latvia to Dubai to Greece to may soon be seen in Spain, Ireland, Belgium, France, the UK, China, and the U.S., who knows where else? We are seeing protectionism, mercantilism, social unrest, and geopolitcal manuvering, all in the midst of a global economic crisis.
Braaaaaaainssssss
Destin < Razor in MvC3
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