OldVet: Part II of Why is the economy in trouble?

This one is by OldVet.

Part II: Why is the economy in trouble?

”Riding the credit wave or crushed by its power?”

A few days ago, Cactus asked why the economy is in trouble. He noted the huge amounts of fiscal and monetary stimulus since GW took office have only produced average amounts of real growth, and then only for a few years.

Continuing on a theme broached by Cactus, it is very likely that we are at a moment of excess and correction in the US real economy which is caused by what I have termed the “financial economy” in some previous posts. Some well-respected economists like Nouriel Roubini are forecasting a pessimistic ending, but not an apocalypse, to this episode. I’m pessimistic in the short and medium term as well, but believe that unwinding the US credit excesses and setting more realistic premiums for risk in financial assets will solve this gloomy period ahead.

(I note that several readers of Angry Bear have a different view on the origins of the present economic problem such as a real world overproduction crisis or other theories which seek to explain what is happening.)

BCA Research, a Canadian investment research outfit founded in 1949, posits a dark ultimate outcome but a more rosy short term prospect for the US. The think we’ve reached “An Inflection Point in the Debt Supercycle”.

BCA believes that large scale Fed intervention combined with continued foreign investment in US assets will simply set off another leg of the asset bubbles we’ve been seeing, which will last through this decade.

”For some time, we have stated that emerging markets and resources were our favored candidates to benefit from a final mania blow-off in the closing years of this decade. This still seems a good bet. One implication is that the dollar would drop further. . .”

After that, at some point, BCA speculates that a deeper correction in credit markets will take place with more severe consequences. But deeply entrenched financial institutions depend on asset prices and growing asset prices means growing financial institutional profits. BCA is predicting that champagne will continue to be the mouthwash of financial moguls for the immediate future. Status loves its quo, after all.

This one was by OldVet.