Friday, November 14, 2008

The Next Boom Will Come

The global economy is in the doldrums. Collapsing housing prices and ensuing foreclosures have brought both borrowers and lenders to their knees, frozen credit markets, depressed stock prices, softened consumer demand, forced oil, metal (even gold) and other commodity prices lower, and now dragged down the commercial real estate market as well. The Bush and Paulson $700 billion financial rescue plan has morphed from an impracticable illiquid-asset buyback plan to shore up bank balance sheets into an across-the-board equity infusion scheme and sadly, along its porky way, lost focus, impact and credibility. Cynics question what benefit Bernanke's many years of academic study of the Great Depression have brought him, or anyone else, for that matter. Respected business figures (for example, Soros and Dimon) warn of a deepening recession in 2009, possibly even a depression.

Given the dour outlook of economic experts and pervasive pessimism of the investing public, it's hard to be optimistic--but I am. I'm confident that better times and a stronger economy lie ahead of us. Really, a brighter future is all but inevitable. Yes, I repeat, just as day follows night, we will see better times. Let me explain the root of my optimism.

Generally speaking, two basic schools of economic thought have been most influential over the past 75 years--Keynesians (including neo-Keynesians), who advocate fiscal measures such as an increase in government spending to stimulate a sluggish economy, and higher taxes to cool an overheated inflationary economy; and monetarists (led by Friedman's Chicago school), who believe that what's more important is controlling the money supply, primarily through buying and selling government bonds in the open market and raising and lowering the discount rate. Both schools of economic thought unabashedly lay claim to real-world successes of their models--Keynesians take credit for lifting the economy back onto its feet through FDR's New Deal spending following the Great Depression in the 1930s, and monetarists boast of steady and prolonged economic growth in the 1980s (Reagan years) and 1990s--despite the many recessions we have seen, including those in recent decades: 1980 (7 months), 1981-1982 (17 months), 1991-1992 (8 months), 2001-2002 (12 months), and presumably 2008-2009.

While these two mainstream schools of economic thought certainly have their differences, they also share an important commonality--both rely heavily on government intervention to control or at least influence economic growth. President Bush's consumer-targeted economic stimulus package during the early days of the current financial crisis and the new stimulus package that President-elect Obama stressed as a high-priority item in his first press conference a week ago are examples of Keynesian policy in action. The Fed's continual "busy-body" adjustment of the discount rate--Greenspan's lowering of the rate to 1% in 2003 during the last recession precipitated by the dot-com bubble, and raising it back up to the 5% range by the time of his retirement in 2006, and Bernanke's pushing the discount rate all the way back down again to 1% last month, while hinting at more rate cuts to follow--are examples of attempts to steer the economy using monetary policy.

In sharp contrast to these two mainstream schools are those who argue that both the Keynesians and monetarists are wrong-headed. For example, the Austrian school, based on the thinking of Mises and Hayek, explain how government intervention is not the solution. Stating that fiscal and monetary policy fail to produce their intended impact, these economists insist that, instead of smoothing the vagaries of the business cycle, government intervention actually causes the booms and busts, through over-extension and over-contraction of credit at artificial prices via the highly government-regulated fractional-reserve banking system. Quite contrary to active intervention, the Austrian school recommends following a laissez-faire "do nothing" approach, theorizing that this is the only way to cure permanently our economic woes. For a coherent exposition of the Austrian school's position, see Murray Rothbard's 1969 essay, "Economic Depressions: Their Cause and Cure," here.

Which economic school is right? Well, first off, practically speaking, it would be grossly out of character and, in fact, outright political suicide for any president--whether lame-duck Bush, or our country's new icon of hope, "renegade" Obama--to tell us American citizens that, after serious dialog and lengthy reflection, the elected officials and their appointed experts have decided that a "do nothing" policy is best. With home foreclosures at historical highs and rising, and growing worries over burdensome credit card balances, auto loans and other consumer debt, the popular approval ratings of even the most charismatic of political leaders would undoubtedly suffer greatly if all their economic advisory team could come up with is to a "do nothing" strategy for tackling the current economic crisis. No, simply put, Americans are by nature more active doers than thinkers, and doing nothing never has been and probably never will be an acceptable alternative for managing our economy.

So, much to the chagrin of Austrian school economists, we must conclude that government intervention, whether effective or not, will continue when Obama and later presidents take office. Given this inevitability that politicians and their mainstream economic advisers will always be inclined to fiddle with the economy, here's the logic of what to expect:
  • If the sketchy long-run track record (performing like a "B" student, with 13 out of the 115 quarters beginning in 1980 showing negative real GDP growth, according to BEA data) of the Keynesians and monetarists is any indication, we should see at least some degree of over-shooting in the future, perhaps this time manifested by a delayed but sudden response of our economy to excessive fiscal stimulus or overly loose monetary policy, resulting in either consumer price inflation or yet another asset bubble. (On the other hand, if by chance (or fluke?) policymakers have learned from the last boom-bust cycle and this time around manage to get the economic fine-tuning exactly right, they will have realized the heroic feat of taming the recalcitrant business cycle, macroeconomic volatility will cease, and we will all live, at least economically, happily ever after. . . . but I would tend to believe other fairy tales before placing undue faith in this one, wouldn't you?)
  • If the Austrian school is correct in their critical analysis of the shortcomings of Keynesian and monetary policy, the current credit-driven bust will inevitably be followed by a boom, and the more our government intervenes to try to fix the problem, the higher the crest and deeper the trough we will see during the next boom-bust cycle.
In other words, however we dissect our economic situation, the business cycle remains alive and well. Both empirically and theoretically, we can be sure that economic booms and busts will continue. Admittedly, the precise timing is anyone's guess but, following the current, painful de-leveraging and retrenchment of credit in our financial system, at some point in the future, credit creation will again be in vogue, creating over-expansion of credit in some asset class, and soon enough spilling over into other asset classes. Yes, however unlikely it may now appear to be (case in point: was anyone predicting a collapse in oil prices to today's $58 per barrel when it soared above $140 as recently as July?), one day we will experience yet another bubble. Seeing how the collective memory of market participants tends to be selective and short, I wouldn't be surprised if such a rebound happens earlier and quicker than any respected market commentator would now dare to predict.

Suffice it to say, for anyone distraught by the current bust, please have patience: the next boom will come--maybe even sooner than you or anyone now thinks.

24 Comments:

Blogger Covered Calls Advisor said...

Lloyd,
I just discovered your blog and am enjoying your writing and insights immensely. I've just saved you as one of my 'Favorites' under my Finance file category which I call 'Macro Viewpoints' since I appreciate the big picture commentary you share.

Question: What magazines, newspapers, websites, and blogs do you like to read?

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12:56 PM, November 16, 2008  
Anonymous Anonymous said...

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10:08 PM, November 17, 2008  
Anonymous Welath Management consultant said...

Th economy has already started showing signs f improvement. In UK the property prices have shown slight improvements in 3 out of the last 4 months. In the US as well which was one of the worst affected, first the first time in 2 years, quarterly figures have shown improvements.

6:25 AM, July 14, 2009  
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Anonymous stock market for beginners said...

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11:32 PM, February 09, 2010  
Anonymous theoharis said...

3/3/2010 Greek bonds rose to their highest "BOOM" it is true.

7:44 AM, March 03, 2010  
Anonymous Penny Trading Guide said...

Good post. Keep the posts coming! You clearly have an healthy interest in the subject.

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5:52 AM, March 17, 2010  
Anonymous theoharis said...

8/4/2010-10:00 As the European Union and the International Monetary Fund, paving the way for the first great 'rescue' turns and the debate about whether Greece can avoid stop payments. Some people see Greece as a new Argentina, noting the surprising similarities of the country in 2001 moved to higher paying position in world history (in dollar terms). Others, primarily the Greek Prime Minister George Papandreou said that the country's problems may well be difficult but manageable, and complaining about the role of maritime international speculators.

8/4/2010-17:00 :Trichet: Greece is not bankrupt

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7:24 AM, April 08, 2010  
Blogger amaurosis.fugax said...

seriously dude...where are you getting this information...its all bogus. I am amazed that you actually think that keynesian and monetarist are two different schools of thoughts. Ever heard of the austrian school of thought?

And there is no mention what so ever of the debt situation of america. You keep wishing of good times but it seems you're living in complete denial.

America no longer produces anything, it is practically de-industrialized and it has a massive debt burden which is far greater than what America could ever hope to pay back.

How do you think that US would be able to borrow money to industrialize (again) when no country in the world is going to lend it.

The entire services industry especially financial services industry in US is phoney and could be wiped out entirely in a few years. It actually got wiped out in a single day but its taking its last breadth by taking tax payer money.

US has yet to hit the bottom...probably in the next decade and then maybe it'll start to rev again like Russia after it collapsed in 1989.

Good times end and when they do....it takes time to accept the fact and to come out of denial

3:16 AM, June 09, 2010  
Anonymous Dave Ravindra said...

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8:17 AM, August 10, 2010  
Anonymous Pension Finder said...

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8:47 AM, November 26, 2010  
Anonymous james moylan said...

I have a web site where I research stocks under five dollars. I am a astute value investor. I would like to comment about the next boom will come. I do not believe that you can build an economy on financial services alone the notion of everbody with a college degree sitting in front of a computer is a complete total fantasy.

9:56 AM, March 08, 2011  
Anonymous Kuba Jewgieniew said...

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8:24 AM, May 04, 2011  
Anonymous Cape Coral Properties said...

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10:40 AM, May 05, 2011  
Anonymous Las Vegas Foreclosures said...

Wonder when that next boom will come..

12:34 PM, May 06, 2011  
Anonymous share tips said...

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6:58 AM, May 18, 2011  
Blogger Real Estate Philippines said...

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10:17 PM, October 04, 2011  
Anonymous Ayala Land said...

Some nations still continue to be in a slump though there are already positive changes felt specially on third-world countries. I guess it all starts here.

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6:43 PM, October 25, 2011  
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1:12 AM, October 26, 2011  
Anonymous Penny stocks said...

I have a web site where I give advise on penny stocks and stocks under five dollars. I have many many years of experience with these sort of stocks. I would like to take a moment to talk about low price stocks not classic penny stocks or stocks under one dollar the term most people most often think of when the word penny stock is used. Their are companies of really decent quality trading under five dollars’ but for every one company trading under five dollars that is of decent quality their are maybe ten of poor quality. So the really big difference between those investors that are tremendously successfull when it comes to investing in low price stocks and those investors that lose enormous amounts of money investing in stocks under five dollars’ is having a great deal of knowledge and experience when it comes to low price stocks’ or having a total lack of knowledge and experience when it comes to low price stocks. Finding quality stocks under five dollars requires a lot more research than finding a decent stock above ten dollars.

9:28 PM, October 29, 2011  
Anonymous Real Estate Investment said...

What are your thoughts on real estate investment. I am thinking of some good investments in real estate as I see the future of a good real estate investment. It is going to give huge returns and in no time

10:44 PM, November 29, 2011  
Anonymous gold and silver investments said...

yes, the economy is a cycle of ups and downs.

12:12 PM, December 13, 2011  
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7:55 PM, December 21, 2011  
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10:41 PM, October 19, 2012  

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