Saturday, January 3, 2009

Better than standing still, but the rot runs deep

As we head into the new year, there's a lot of anxiety over where the economy is headed. According to most economists, Canada is probably facing only a mild recession, with a recovery possibly beginning within six months. Historically, bull markets after recessions lead the actual economic recovery by roughly that length of time. Investors speculate on future economic performance, not what has already happened. And the markets have indeed been optimistic over the past week or so.

This article is most likely right that while 2009 will be a positive year, we shouldn't expect a boom right away. This, I think, is the key point:

But even a modest improvement in the economy, which has been in recession since last December, could help stocks extend their recent run.

"If you're standing still, walking is a pickup of speed," said Alan Levenson, chief economist at T. Rowe Price Associates Inc.

Also, this:

In addition, some analysts believe the market will improve because so many investors have pulled out, leaving little room for more selling.

"Given the nasty carnage how much further risk is there?" said David Darst, chief investment strategist for Morgan Stanley's global wealth management group.

It's going to take a little longer for the credit markets to recover, with the banks still in an extremely cautious state after being burned so badly in the crisis of 2008.

And it's important to remember that the US is not out of the woods yet. They still face some very serious problems, new administration or not. That $11 trillion in national debt isn't going away just because the new President has a (D) next to his name. Nor are GM and Ford going to suddenly become competitive simply because the government threw them a few billion dollars to keep them from drowning. Nor is an economy based on people borrowing money to buy shit from China while they struggle to pay for their health insurance and ever more expensive gasoline ever going to be viable in the long run. A lot of things need to change for America's economy to be healthy again, but one of the most immediate problems is a simple lack of revenues.

Bush's tax cuts and resultant deficits have left America's government starved of cash, forced to borrow record amounts of money in order to keep their economy afloat and avoid a longer term depression. The conservative mantra of tax cuts, tax cuts, and more tax cuts was sold on the idea that they were necessary for the health of the economy. Yet the government kept spending money and the economy crashed anyway. Now that it is necessary for the government to spend money, all they can do is borrow imaginary money that will be paid back through some combination of fairy dust, heavenly manna, and magic jelly beans.

The challenge for the new US administration is going to be stimulating the economy without bankrupting the country or resorting to devaluation of the currency. Obama will need to cut some expenditures (military pork spending, Iraq) while increasing others (public works, health care, alternative energy). It's a fine line to walk, and it isn't going to be easy.

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