The Big Three of the Economy
The latter part of the year developed quickly as the stock markets around the world fell from their highs to find new bottoms all in a matter of a few months. What began slowly as an energy crisis and next a mortgage crisis soon panned out to be the worst plunge the US markets have seen in quite some time. Thee roaring market of the 1990s burst much slower and over a matter of months while recent market movements have shown more volatility in days than we used to see in whole weeks or even months.
Understanding why everything fell out so quickly might give us an idea of when the bottom is coming and how it can be profitable for everyone.
Subprimes
Subprime lending will be a problem for as long as it exists. The fact is that some people cannot be given loans to buy houses and no matter how affordable you try to make it some people are just not as financially responsible as others. Lenders didn’t help much either with adjustable rates that sent monthly payments through the roof and the investment pooring into the housing industry didn’t help keep houses any more affordable.
Credit crunch
The credit crunch was a much bigger deal than subprime lending for the simple fact that much of the US economy’s expansion in the past 20 years has come solely from credit and an expanding monetary base. But the thing is the monetary base has been expanded by 60% since the crisis began and banks aren’t lending and people aren’t borrowing. The solution to this issue might be found in the next segment.
Economic Stimulus
Looking back its easy to see that the $155 Billion passed this summer was nothing more than an attempt to skew GDP in later quarters up a few points, the problem (also the solution) is that people took the money and paid off debts rather than bought more consumer products. The next stimulus package proves to be much bigger, $850 Billion to the American people through improvements in infrastructure and education, environmental programs and tax cuts. The next economic stimulus will hopefully put people in jobs where they’ll again be able to borrow and solve the credit crunch ordeal.
The turning point for the markets next year might just be the GDP recordings after the second half of the year. The stimulus package of $850 Billion looks like it will fly right through the House and Senate and come back to Obama for an obvious signature into law. When this stimulus begins to make its way back into the economy, new jobs are going to be created, the numbers are going to look great and people will spend again with higher credit lines stemming from cheap credit and a hugely inflated monetary base.
There is plenty of credit to go around once banks decide its time to lend. But its going to take an improving economy and a return of employment opportunities to get people spending. If this next stimulus is enough to change consumer confidence, 2009 could be a huge inflation led rally of stocks, commodities and even real estate.
