I just read an opinion piece titled “Signs of hope on world economy” on the Irish Times website and wanted to write some of my thoughts on it.
Surely the comments of Ben Bernanke, or any economic advisor, holds very little weight now. If these people really are the experts they’re believed to be, and can mystically foresee the path of any economy, whether local or global, they would’ve foreseen the current crisis two years or more ago and worked to combat it then.
The recovery in the consumer market, if present at all, will be short lived. Current trends in the US show household savings approaching 5%, up from the 0% of the bubble epoch. They also show average household income decreasing – understandable when you consider the number of jobs being lost. In short, the US consumer cannot simulataneously earn less money, save more money and spend more money.
A recovery in the housing market cannot take place until the stock of foreclosed properties that banks are holding onto are sold. We’re also still waiting on hundreds of thousands of “Alt-A” mortgages, sold in the US, to reset to higher interest rates, and force even more foreclosures. Lastly, even if consumers are spending slightly more than they did 6 months ago by using debt again, this cannot last for long because the US is already the largest debtor nation in the world, and eventually, it will be unable to find people to buy its debt at such low return rates.
What I suspect is happening is that the US, whose citizens seem to pay more attention to stock prices than European citizens do, see a rally in stock prices and suspect things are not as bad as they thought 6 months ago. However, this rally will end, and stock prices will fall below where this rally started. I suspect the cause of this rally could be seemingly attractive prices of company stocks. This would be based on previous earnings, and an estimate of future earnings. This can make stock price-to-earnings ratios look attractive now, but this is based on earnings in the bubble epoch. Future sales will not approach these levels, and when the future earnings fail to meet expectations, stock prices will begin to slide downwards again.
Don’t be fooled by this bounce – it is not the recovery we all await. In order for a true recovery to take place, the world must first start to pay down its debts and return to a more solid base from which to grow. Printing money, no matter how much of it you print, will not initiatate a true recovery.
