Speaking of cliffs, Buffet said that the economy was likely only hours away from complete disintegration in September when Lehman Brot
ers went belly up and AIG Inc. asked for and received its first dose of bailout money. As credit markets went into a state of shock, it felt almost as if the planet had stopped spinning. It didn't, but it sure felt as if it did. Slowly and painfully, the wheels started turning again. But it was, and still is, a weary kind of turning, the kind that just makes everyone on board sick with anxiety, wondering when this gruesome ride is finally going to be over.
I watched quite a few shows over the weekend, analyzing what is going on with the economy. I saw that the dominant question was how come no one, not even the so-called "smartest guys' in the room, saw it coming? Even Warren Buffett, the Oracle of Omaha, admitted to his shareholders that he didn't think the asset bubble -- referring to the real estate bubble mostly -- would first implode so severely and then explode to the power of 10, spilling over into botched securitizations, complex debt derivatives and similar markets. It was the trigger that resulted in the worst-case scenarios panning out, including rapidly declining business activity and unemployment soaring into the stratosphere.
It is true that the turnaround cannot happen on nickels and dimes, but here I go again, whining about bailouts. I just don't think that the bailout money, all those billions of taxpayer dollars, should go to every bank that comes knocking. Banks that can should go about doing what they do best – banking -- and find their way out of this recession the old way -- by earning it. As for the banks that are about to fail, they should be left to fail and their customers shouldn't worry about their money, because their deposits are insured, so bank runs and paralysis of the banking system is really not likely in our society.
Buffett gave his shareholders a time frame, saying that "five years from now, I can guarantee you that the machine will be running fine. We do have the greatest economic machine that man has ever created." Hopefully, it won't be that long before we can all talk about this period with any amount of a historian's calm.
The only problem with this pretty picture is that typically, the greater the fall off the cliff, the greater the inflation, if and when the economy finally rebounds. With an economy in recovery, the demand rebounds. With the demand outpacing the supply, prices tend to go up. And here we go again, with inflation rearing its ugly head, spoiling a good thing yet again.
In 1936, Jacob Viner, an economist who is best known for his models of long- and short-run cost curves, said that, "In a world organized in accordance with Keynes' specifications, there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead."
In case anyone needs a history lesson refresher, the 1970s were the only period in the U.S. when it has experienced peace-time inflation. It was also the only time when the level of price uncertainty was so high that every business decision was at the same time a gamble on monetary policy. The bottom line was that, due to an unprecedented gush in price levels, peace-time inflation increased to the five percent to 10% range. It was as if inflation was a result of a major world war. And if printing presses keep ahead of economic logic this time, too, we could be heading towards something similar when this recession finally resolves itself.
Profit Confidential
---
http://www.profitconfidential.com/
LOMBARDI PUBLISHING CORPORATION
News, Analysis, and Information Services Since 1986.
One Million Customers in 141 Countries.
Lombardi Publishing Corporation
Financial Publications Division
350 Fifth Avenue, Suite 3304
New York, NY 10118-3304
---
Copyright 2008; Lombardi Publishing Corporation. All rights reserved. No part of this e-newsletter may be used or reproduced in any manner or means, including print, electronic, mechanical, or by any information storage and retrieval system whatsoever , without written permission from the copyright holder.
About the author
Inya Ivkovic, BA, MA, Senior Editor at Lombardi Financial, is the editor of Explosive Mine Stocks, Bio-Tech Breakthroughs and Payload Stocks. She is co-author of The Revenge to Riches Strategy: How You Can Profit from the Secret Greenspan Plan. Before joining Lombardi, Inya held several positions with large North American financial institutions, and has been an academic specialist for a securities institute, a trader, and an investment advisor. Inya's diverse market background and passion for stocks delivers an institutional perspective to Lombardi Financial readers.
แสดงความคิดเห็น