As a new year begins, so does speculation about how we can expect the economy to “behave” going forward. To the surprise of many people, most markets have been in the red since the beginning of the year. The dow has already dropped over 1000 points as the Fed announced another cut-back of 10 million on their bond buying.
My personal opinion is that, much as the media may portray it that way, the macroeconomic data doesn’t suggest that we have left the recession behind. Much the opposite, many would say the worst is yet to come.
Like I’ve commented on other posts, the actions taken in response to the financial crisis of 08 have done nothing but aggravate the problems we had, or at best, delayed the inevitable for a few years, but now those years have passed…
The followong list sums up the essentials.
-Banks, and to a more general sense, debt, has yet to be properly restructured. The problem is Central Bank policy prevents this from happening. Futhermore, this is holding up the process by which new and profitable businesses can flourish
-Fiscal deficits are too high, and worst of all, most countries are combating this by increasing taxes.
-Currencies are unreliable, this is why Gold has gone up 5% since the beginning of the year. As the market becomes more uncertain, more people are moving back to gold.
-Unemployment is persistently high. Again, this is a two-fold structural problem. On the one hand, Central Bank policy is preventing debt deleveraging and capital reallocation, so business can’t flourish. In conjunction with this, we have the ever present structural obstacles in the labor market.
All of these factors are the main culprits of the low levels of growth that we see across the globe.
Conversely, while growth and wealth creation are stagnant, the financial markets are being force fed in the way of monetary stimulus, this is why the stock market has not reflected the reality of the situation for most of 2013, and why the outlook for the economy as a whole is generally overly optimistic.
All this is now evident to you and me. But where is the media pointing the finger?
You might hear a lot of talk, if you follow the financial world, of emerging market volatility. Now I admit that I don’t keep up to date with the emerging markets, but I highly doubt there’s a real reason there. If anything, it’s the declining U.S. and European indexes which would affect the emerging markets, don’t you think?
But that’s the point. You can’t expect government officials and mainstream media to point the finger at themselves, so it’s no surprise that they are coming up with all sort of external factor explanations.