jwk, it proves a contention i have repeatedly posted over the months of November ands December, namely that the Fed's y2k related liquidity injections were largely misused to fuel the rally in the Nasdaq, all official protestations to the contrary notwithstanding.
imo the Fed has a direct responsibility for creating one of the biggest and most dangerous financial bubbles in the history of speculating man. i have no doubt as to where this will ultimately lead: one of these days, a seemingly innocent exogenous event will undermine the speculators' confidence leading to a stock market crash. the massive debt burden will remain, while stock and real estate values will have been wiped out. finally the current account deficit will come back under control, as consumer spending abates and the savings rate rises once more. banks will refuse to lend as they will be sitting on a mountain of unrecoverable loans. the global economy will enter a downward spiral from which it may take years, maybe even decades to emerge from. in some countries it will take the shape of a deflationary depression (as China and Japan are already experiencing) in others hyper-inflation will rage for a while (yes, the two can co-exist). eventually a bottom will be found and the cycle will start anew with stock markets rising and economies recovering.
now i am well aware that similar gloomy predictions have been proven wrong in the past few years and obviously the day of reckoning may still be a few months or even years (not what i think - months will do for me) off. but the ultimate outcome is beyond doubt imo.
the speculative bubble induced by the credit bubble aided and abetted by the Fed can only end thusly.
note that the big bubbles of the past in this century (20's globally, 80's mainly in Japan) have all given rise to talk about a 'new era' as they were accompanied by disinflation and rising productivity as well as technological advances of considerable import. however, they have invariably ended badly; as it turned out, the laws of economics had not been repealed after all. the same is true here. today Greenspan is a hero - if he will be remembered in the history books as such is highly doubtful.
regards,
hb |
