The two words sound about the same in English spoken with a West Texas twang. Just ask the guys who ran El Paso Natural Gas into the ground back in the '80s.
The good news is that if you are still alive, your way of life will probably survive the current financial crisis. The bad news is that you may not survive the next one, which is coming, and if you do survive that one, there is another one coming after that.
I tend to look at the current situation as though it had two components--a severe recession in the general economy and a solvency crisis in the financial services sector. I'm in good company taking that view, but it's important to remember that the one affects the other--so that the recession was triggered by the financial services sector liquidity crisis, and the future solvency of the financial services sector is virtually certain to be impacted by deteriorating conditions in the general economy.
That said, let's statically assume that the stimulus package will 'work', bolstering the level of economic activity and buffering the worst of the recession's impact (without regard to the failure of the social safety net in the current environment). And let's assume that eventually one of the bailouts does the trick and we have a financial services sector in which, even if lending activity is non-existent, the comp committee is meeting again. In other words, the recent bear market rally correctly discounting an imminent mild improvement in short term economic conditions (I leave for you to decide whether that is merely a slowing or end of the deterioration or an actual improvement off the new base--nobody is realistically projecting a return to the glory days).
What does that success buy us? I think it buys us two things. First, it will give the feedback loop time to run from the general economy back into the financial services sector. Already weakened financial institutions will have to absorb the consequences of the recession (remember that the current capital crisis came out of the clear blue sky in a healthy general economy, this new event is much more typical). Of course, whether, even with government injections, the institutions can find the capital buffer to absorb that is a problem for another day (i.e., the next crisis).
The second thing that it buys us is time to deal with the issues the People's Bank of China has begun ventilating in articles and speeches by its personnel and on its website. In the most thought provoking thing I have read this month was Martin Wolfe's conjecture that these concerns will lie at the root of the next global financial crisis. Well, the premise there is that there will be another global financial crisis, and that it will come sooner rather than later. I think that's a sound premise. How it will be manifest--a currency crisis, a refunding crisis, inflationary pressures from monetizing the costs of the bailout--is a topic for the future.
The human mind is wired so that it vividly remembers major events, but memory tends to screen and obscure the details of the circumstances of those events and the mechanics by which they unfolded. There is a great deal of talk about the Great Depression and the 70s, but most of it omits the gritty fact that those Big Events were actually a series of smaller, cumulative crises that unfolded through time, frequently with the policies intended to address on crisis triggering the subsequent one. In neither of those situations did the internal dynamic of a market economy, as tweaked by the inputs of technocrats in positions of regulatory power, determine the more important outcomes.
As much as the economists are clutching to John Maynard Keynes and The General Theory, it might be time to recall The Dialectic of History, too.
Schedule for Week of May 28, 2017
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