Amid warnings of doom for the US economy, a piece of good news poked its head above the parapet yesterday.
First off with the dire warnings was Ben Bernanke. Alas, plain speaking Ben drew an unfavourable comparison with the dotcom crash.
Yesterday was the occasion of his twice-yearly report to the Senate Banking Committee, and the picture he painted was none too pleasing.
In fact, he suggested, right now conditions are worse than at the time of the dotcom crash: “The effects of the stock market declines were primarily on investments. In this case, consumers are taking the brunt of the effects.”
“Am I hearing you correctly” asked a worried Sen. Christopher J. Dodd, chairman of the committee,“That we’re in actually — we’re in a worse position today to respond to this than we were eight years ago?”
“I think that’s fair,” replied the hapless Ben, “in that both fiscal and monetary face some additional constraints.” He went on to say, “There probably will be some bank failures. There are, for example, some small, or, in many cases, banks that are heavily invested in real estate in locales where prices have fallen and therefore they would be under some pressure.”
Meanwhile, Tim Collins of Ripplewood Holdings, while at the Super Return private equity and venture capital conference in Munich, started drawing comparison with Japan before its so-called loss decade of economic growth, and said, “ “My fear is that we will prolong it and suffer a death of a thousand cuts after we have exhausted all the options…Even without a recession and with all of the policy tools available we still have hundreds of billions of dollars of losses.”
In Japan, a crash in asset prices was compounded by secrecy.. banks didn’t want to let on how bad things were, the government headed for the nearest sandpit, and buried its head. It doesn’t seem likely the US will go that way. But as Mr Collins said, “You have to wait for the tide to go out to see who is wearing a bathing suit.”
In other words, we still don’t know who is carrying the can for the credit crisis.
But then, returning to Mr Bernanke, he did strike a more pleasing note when he said, “I don’t anticipate stagflation, I don’t think we’re anywhere near the situation that prevailed in the 1970s.”
But actually, that is not the point. Our debt is so much greater now, and while inflation can be good for eroding the true value of debt in the long run, it will mean interest rates will have to shoot up – and in the short-term that could be very bad indeed.
By cutting rates at a time of growing inflation fears, the Fed could be making things very much worse down the line.
But here is the good news. Yesterday, the latest data on US growth was released. The stats are still saying the US grew at a tiny annualised rate of 0.6 per cent in the last quarter, but apparently inventory levels fell dramatically during the period. Once the stock of inventories is gone, then of course US businesses will have to go spending and replace this stock.
Rises and falls in inventories are one of the tell-tale signs of movements in the economic cycle.
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