Monday Open Thread: Market/Economy Edition

Well, for those of you who follow the financial world, the market was all over the place last week. We saw the fed come in and try to inject $7B in liquidity, only to see the Dow drop 2% afterwards. We then saw a rate cut and a rally to close the week. Today has already been a rollercoaster. And everyone thinks that rate cut will be the saving grace and we’re clear sailing from here. I saw some pundits on the idiot box talking about how suddenly the financial stocks were “cheap”, and even heard someone say the Dow would be back to 14,000 within “weeks”. And all of them were laughing off the guy who said we have a lot farther to go before we hit bottom.

So what’s your prognosis? Both from a market standpoint and a general economy standpoint. Everyone knows I’m bearish over the next 5-10 years, but I’m an engineer, not a finance whiz, so I’d love to hear everyone else’s take.

And as an added question, what do you see our next President doing if the economy falters? You’re free to predict your own next President for that one.

  • TanGeng

    The long term prognosis (10-15 years) for the US economy is bearish or stagnation base on demographical changes over those years. The working age population doesn’t grow very fast, but the retired population will explode in size. This is one of the reasons why America needs immigration.

    In the short term, the market has nowhere to go but down. The market needs to digest all of the bad debt. The economy can either do this slowly for a long protracted pain (stagflation), or rapidly in a panic. In the long run, it’s better for the economy to get it over with quickly, but the politicians will pay the price, so I doubt that the people in power will acquiesce to a rapid solution.

    What we saw last week was that the Fed cannot try to do too much. A change in the infrequently used discount rate rallied the market. But an announcement of an emergency cut in the Fed Funds Rate would have reflect a far more serious problem. It would be such a sign of weakness that it might trigger a panic. The market is very fragile right now.

    The bulls are playing their part to maintain confidence in the market. Following their advice would be foolish.

  • TanGeng

    Of course, protract the pain out long enough, and the stock market may very well make its way back to 14000.

    Short term economic gauges look fine, but problems can spread from one part of the economy to another. If the housing sector fails apart, existing investment in other sectors will become far less appealing than they are now and that will eventually weaken the outlook based on economic gauges.

  • Logan

    The only solution that you won’t hear the CNBC pundits promulgate is to abolish the Fed entirely and have the Congress raise reserve requirements incrementally for 1-2 years until all banks are operating on 100% reserves. The Treasury department would simultaneously print new money and spend it into circulation at around the same rate that the bank credit was being extinguished by the increased reserve ratio. Ideally, it could be spent on Social Security payments with a concurrent decrease in payroll tax, which would spur employment and make sure that the people most vulnerable to the “seniorage” effect of inflation, low fixed-income seniors, would not be harmed disproportionately by the new injection of money. After banks reached the 100% reserve requirement, they could then return to any reserve requirement that they found suitable, but without the Fed or FDIC to bail them out. Without these moral hazards, banks would never return to the ridiculously low reserve ratios that now is the standard (I think it’s 10%, or less in some cases). Also, the Treasury department would be limited to printing money only for replacement purposes of worn-out bills. This would turn off the spigot that all governments have used to finance extravagant welfare programs and costly wars.