The real question is whether the huge stimulus (which could be as high or maybe higher as $400 B, as I have tried to calculate earlier) will nudge the economy out of its current two quarters contraction within another two quarters. I think that a stimulus of 3% or more of GDP is unprecedented, but I do not have historical data to back this. What I do know is that since July 2nd, the national debt has increased by a solid 138 Billions (from 5.693 Trillions to 5.831 Trillions, to be accurate I should say just $100 B since by July 2nd there was a big $33 B injection into the treasury from quarterly tax receipts), that is quite a sum of money the Fed are putting into the economy. What is clear, however, is that when the feds go into the market and borrow, they are eventually going to have and pay a higher premium, and thus the next major leg down, will, IMTO, be signaled by first longer term rates creeping up, and then the feds being forced by the market to raise short term rates formally. They will try and delay that as much as possible, resulting in a very steep yield curve. If the economy rebounds (and thus deficits once more contract or stabilize) sharply by the second or third quarter, they may be able to move and soak back some excess liquidity by late next summer (giving us a memorable October Massacre in 2002? Just before congressional election? They did it before....), if the bounce is slower, the next bull will probably "live" through at least the end of January 2003. What could change this outlook? If despite the stimulus, the economy does not rebound at all and we find ourselves still marred in a recession by next summer.
Zeev |
