The Economist: Bubble Warning --- "Something's Got To Give"

[kpete]

Bubble warning

Jan 7th 2010
From The Economist print edition
Markets are too dependent on unsustainable government stimulus. Something’s got to give

.................

It doesn’t add up

But the more immediate risks may be posed by fiscal policy. Many governments responded to the crisis by, in effect, taking the debt burden off the private sector’s balance-sheets and putting it on their own. This caused a huge gap to open up in government finances. Deficits in America and Britain, for instance, stand at more than 10% of GDP.

Most developed-country governments have managed to finance these deficits fairly easily so far. In the early stages of the crisis, investors were happy to opt for the safety of government bonds. Then central banks resorted to quantitative easing (QE), a polite term for the creation of money. The Bank of England, for example, has bought the equivalent of one year’s entire fiscal deficit. There are signs, however, that private-sector investors’ appetite for government debt may be just about sated, as they contemplate the vast amount of government bonds that are due to be issued this year and the ending of QE programmes. The yields on ten-year Treasury bonds and British gilts have both risen by more than half a percentage point since late November.

Investors (along with this newspaper) would like to see governments unveil clear plans for reducing those deficits over the medium term, with the emphasis on spending cuts rather than tax increases. But politicians are nervous about the likely reaction of electorates, not to mention the short-term economic impact of fiscal tightening, and are proving reluctant to specify where the cuts will be made.

.......................

Investors tempted to take comfort from the fact that asset prices are still below their peaks would do well to remember that they may yet fall back a very long way. The Japanese stock market still trades at a quarter of the high it reached 20 years ago. The NASDAQ trades at half the level it reached during dotcom mania. Today the prices of many assets are being held up by unsustainable fiscal and monetary stimulus.

Something has to give.

more:
http://www.economist.com/opinion/displayStory.cfm?story_id=15213157&source=hptextfeature

[Warpy]

1. That's what I told my financial guy

There is no earthly reason for the Dow to be over 10,000 except that their are too many hoarded dollars chasing investments, the dollar has been allowed to drop and lure in foreign investors, and that there is little room for small time investors anywhere else.

I fully expect another jaw dropping plunge in the market before Congress gets off its dead, corporate ass and starts doing some of the things that are necessary to get our financial house back in order.

What we have now is no more sustainable than the exploding consumer debt as the only thing propping up a consumer economy was.

[hunter]

4. "Jaw dropping plunge..." or bubble bursting inflation.

Whatever it is it won't be pleasant.

[Warpy]

7. Nope, but I'm emotionally and financially prepared for it.

Even if I'm not as prepared as I think I am, I know how to be poor, I've certainly done enough of it.

I just didn't want to do it again so soon. Oh, well, I got a good 2 years out of the illusion of being middle class.

[ixion]

2. there is much that doesn't add up to "recovering" to "normal"

and this is certainly one of those variables.

[zbdent]

3. "Many governments responded to the crisis by, in effect, taking the debt burden off the private

sector’s balance-sheets" ...

socialize the risk, privatize the profits ...

Thank ya Gee Dumbya, for bailing out the "too big to fail" banks ...

[Karmadillo]

5. Keep clapping, everybody!!! Please!!! Keep clapping!!!

nt

[starroute]

6. Ending two wars would be one easy way to cut spending

Just saying'...

[jwirr]

8. I was thinking of that and wondering which would come first: strengthening

our nation or continuing to feed the military industrial complex? It is going to come down to making that decision sooner or later.

[Warpy]

9. The Pentagon needs to go on a strict diet.

Empire is a rich man's ambition and the rich man doesn't want to pay for it. We can no longer afford having it on our own backs.

The Pentagon needs to be cut 10% per year until our spending is in line with what other countries spend. Its mission needs to be redefined as one of defense.

If we don't yield empire, it will be taken from us. It's better to do it on our own terms.