Tony Fell: Reflections on the financial crisis and the way ahead

Discussion in 'Economics' started by abattia, Sep 24, 2010.

  1. "Thomas Carlyle called economics the “dismal science.” How right he was.
    I have always said that governments, banks and dealers should have as many
    economists on staff as possible to increase their chances of having one that’s
    “right”." Tony Fells - good one

    no recovery for 10 years !!! -
    "We are going to be living with the consequences of this crisis for five to ten years."
  2. 10 years???

    traders will; go broke

    Over the past three years we have witnessed the bursting of a 25 year global debt, credit and real estate bubble of monumental proportions.

    The harsh truth is that there is no painless way out of this debt and credit trap we have built for ourselves – NO SILVER bullet.

    You don’t undo a 25 year credit bubble in two or three years.

    Ludwig von Mises, the great Austrian Economist who died in 1973, made the following statement which is absolutely relevant today: “There is no means of avoiding a final collapse of a boom brought about
    by credit expansion.

    “The alternatives are only whether the crisis should come sooner, as a result of the voluntary abandonment of further credit expansion…Or later, as a final and total catastrophe of the currency systems involved.”

    In effect, he said there is no painless way out of a credit expansion that has gone too far and this debt super cycle went – way too far.

    You either take major pain now, and then move on, or you spread major pain out over a decade. It would seem we are opting for the latter.

    The market seems reluctant to accept the fact that the deleveraging of sovereign governments, financial institutions, home owners and consumers is going to take a long time.

    We are going to be living with the consequences of this crisis for five to ten years.

    Governments are going to have to rein in government spending and increase taxes and consumers should transition from borrowing and spending to saving more and spending less.

    Governments should be encouraging individuals to save which, of course, means less consumer spending.

    What’s wrong with saving more and spending less? Hopefully the age of conspicuous consumption is over and we are entering a new age of thrift.

    In the two decades prior to this crisis there was a major decline in the consumer savings rate in the U.S. from 8 to 10% of disposable income to virtually zero. It has now rebounded to the 5 to 6% range but what is required is for the savings rate to go back to 7 to 10% for a number of years.

    Apart from high unemployment, the coming five to 10 year period will be difficult for investors. Pension fund deficits will grow, retirees will struggle for income and it’s going to be a period of subdued sub-par
    economic growth and sub-par equity returns. Bear in mind the S & P 500 Index is now more than 25% below where it was ten years ago.

    A 25 year party financed with ever-increasing accumulated debt is over. It’s been a wonderful generational experience, but now we are going to pay the price on the instalment basis over the next several years.

    Looking back one has to ask again: How did we let it all happen?

    It’s quite incredible. The Federal Reserve has been concerned about inflation for decades but now it’s primary challenge is to re-ignite inflation.

    Looking ahead I have concern about the political will of governments to rein in their deficits, especially the U.S. and southern Europe, and about the ability of central banks to thread the needle between inflation and deflation and between stimulus and retrenchment.

    It’s of concern that major unpopular public policy decisions don’t get made until there is a crisis.

    Also, I think there are signs that the global financial system, including the capital and foreign exchange markets, have grown too big and too complex to manage or perhaps even understand and control.

    Over the last fifteen or twenty years millions have turned into billions, have turned into trillions and the next step is hundreds of trillions.

    In terms of the constant drumbeat of economic forecasts we hear each week, the fact is we are in totally uncharted waters.

    In such an environment no one on the face of the planet, including the highest ranking Central Banker or Regulator or the most astute investor, even Warren Buffet, knows how it will play out.

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