The Great Mystification
Bernanke said it first. Trichet followed suit. The OECD is already preparing banquets and workshops in June to look beyond the crisis. As if it were over. All this is ludicrous framing and wishful thinking, which goes like: “if we shift the attention from the unfolding effects of the crisis (such as skyrocketing unemployment) to the sunny landscape of recovery in 2010, 2011, or…, then the psychology of investors and consumers will change and the economy will start sputtering back into motion”. In more technical terms, they want to shift expectations about the future state of the economy. We think it’s not going to work. No matter how you frame the argument, reality bites harder than media manipulation, if you’re fired or evicted. You just won’t believe the hype that we’ll all be better off a year into the future when you’re forced to sleep in a car. More to the point, for every green shoot uncovered, a new can of worms comes open: transoceanic commerce coming to a halt, investment toward emerging economies sagging, eurozone dropping like a stone, rising oil and food prices, you name it. Every piece of so so economic news is matched by a barrage of negative announcements. The present optimism is mostly due to the stock market rally in Wall Street since its March lows. However, savvy investors should remember that during major recessions the volatility of stocks is amplified: it can yo-yo like crazy from gloom to boom and back to gloom. Also, after the September 2008 financial implosion, equity markets are no longer the main actors in the story: governments, banks and bond markets are what matters today for the economy.
True, America and China, unlike Europe, have pumped trillions in the economy to support demand. Their huge fiscal stimulus seems to be paying off. Problem is toxic assets still plague the US and EU financial systems, and a huge credit card default crisis lies in store, when Bank of America and others will be forced to acknowledge the extent of their losses on finanical assets in their balance sheets. If consumer credit goes bust, the recovery just won’t happen, unless purchasing power is redistributed — by tax or strike — toward employees and lower social strata in America, Europe, Asia, and a new international monetary system, based on stocks of primary goods and on fixed, but adjustable, exchange rates, comes into being. Kaldor proposed it to the UN thirty years ago. It would provide a firmer anchor for the global economy than current international reserve currencies, and promote North-South economic realignment, since it would regulate the terms of trade between manufactured goods and agricultural and mineral commodities.
Don’t believe the hype: the recovery is NOT around the corner. It remains to be seen what will happen when, especially in Europe, the crisis worsens in late 2009 and early 2010: Anarchy in the EU?