December, 2007
Heavy snow is drifting up my driveway and there are signs that comparable storms await us in the global business cycle. The Fed has very wisely tried to inject much needed liquidity in the US and other leading western economies.But according to a series of articles in the weekend Financial Times and Saturday's New York Times not everyone is buying the policy thrust as guaranteed to succeed. The problem is the very nature of the intervention and the very poor quality of the underlying assets that are in trouble. Since injecting liquidity still obliges the banks and other asset holders to ultimately absorb the bad debt the liquidity option injects much needed breathing space but still doesn't eliminate the problem. The 400 billion or so dollars tied up in these assets is a small amount relative to the western economies GDP but it is not an insignificant amount.
For example if we add up the GDP of Canada 1.3 trillion, the US 13.8 trillion, Japan 4.2 trillion, Germany 2.6 trillion, Italy 1.76 trillion and Great Britain 1.9 trillion, the total is over 24 trillion dollars.So a writedown of .4 of a trillion can be seen in better perspective. A significant effect but far from a catastrophic one.
The other point that needs to be carefully evaluated is the possibility that the stock and commodity markets and the real estate markets are substantially overvalued and bears may be emerging out of the snow swept forests to scavenge for food - investors myself included beware
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