The Summer of Disarray

New York, 1 August 2011.

The final, revised GDP number for Q1 was + 1.9%.
Then it was belatedledly adjusted to + 0.4%.
We already knew that economists were not very good at predicting next quarter’s growth.
Now we know they are not even able to predict past quarters.

Not so long ago, markets rallied on stimulus.
When stimulus petered out, money printing became the solution.
QE 2 was leading, we were told by economists, to 4% growth in the first quarter of 2011.
It did not happen.
Instead, we got one tenth of their predictions.
Thus comes an austerity package.
Markets will love it.
We’ll get yet another relief rally.
Whatever is thrown at us, markets love it.
Be it stimulus or austerity, it can only be good news.

Once again, we will turn the corner.
A summer of recovery.
A transitory problem.
A soft patch.
The next move in the economic cycle can only be up.

Unfortunately, after turning the corner so many times, we have now come full circle.
We are back to square one.
Only, this time we will have to start anew with a huge debt burden.

Last Friday’s GDP revision was bad enough.
But something else was overlooked.
Inflation was underestimated as well.
The quarter on quarter GDP price index had to be revised.
It came at 2.5% in Q1, up from the initial and revised 2%.
In Q2, it still stands at 2.3%.
At least for now.
Interestingly, and unlike GDP, this inflation number is not annualized.
Could it be a coincidence?

Here is the riddle I have tried to solve over the last 2 years.
How can policies that have utterly failed in Europe and Japan succeed in the US?
Are we that special?
Furthermore, counting on a weak currency is the next big fallacy.
All economies around the world are slowing down, reducing any hopes of an export-led recovery.

So, now we are entering the blame game.
The drunken sailor will surely blame his bad hangover on the rehab institution.
Even if this moment of reckoning could not be avoided.

Most brilliant economists are telling us it is too soon to tighten our belts.
They all want us to go on spending borrowed money for a while longer.
Otherwise, a recession will ensue.
They point to FDR’s premature tightening that caused the 1937 collapse of the stock market.

Eight years after the 1929 sell-off, it was still too early to get our fiscal house in order.
Of course, ten years later it still would have been too early.

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