Perfect Storm or Smooth Sailing Ahead?

In faith based systems it proves hard to tell what lies ahead. As many have observed, "Things go well until they don't." Then watch out! Particularly if faith has pushed things to irrational extremes. Recently Michael Panzner outlined a perfect storm scenario, with over-hyped derivatives at center stage. A month ago, Rick Ackerman argued that deflation is inevitable, since monetary authorities will not give us hyperinflation and, according to his beliefs, deflation or hyperinflation (also likely accompanied by asset deflation) are the only two alternatives left. Doug Noland and Paul Kasriel have been warning us all along, as have others, that the Fed is out of moves.

On the other side of the street, perchance whistling past the graveyard (or perhaps not) are a good share of those who are paid to cheerlead, as well as those charged to make policy knowing that they don't ever want to stampede "the herd." Added to this list most recently is St. Louis Fed president; see William Poole's Nov. 9 remarks. See also The Economist's View on Poole's Speech. I wish I had the time to keep a running tally of those who cheerlead and those who naysay. I guess we will leave that to someone who, unlike me, does this as more than a hobby.

And we should not forget that there are some 'true believers' on this latter side of the street too. True believers believe in markets as both free and magic. And if markets are not yet free enough to work magic, then they soon will be. Hence, don't worry, be happy! I guess we'll never know how to separate the three camps.

As for me, I'll continue to watch my list of Potential Triggers for Economic Nightmares, and not fret too much that others are getting rich by milking the herd's seemingly insatiable appetite for ever-more risk, ever-more irrational exuberance. I'm glad that my lifestyle (and that of my family) is one of voluntary simplicity and thrift.

If Ackerman is right, then we will be rewarded in the end for being savers instead of debtors. If Ackerman is wrong, we won't have kindled ever-greater wants misperceived as needs. Thus, we might be happy enough growing our own food and continuing to live simply. That is, IF the spendthrifts of our Spendthrift Nation don't band together in political unity or mob-force and take it all from we savers on the other side of a crash that takes down housing wealth illusion first, stock market wealth illusion second. {Note: I saw a better reference but I can't now find it. If I do I'll amend this post. It went something like "X warns that stock markets have been recently hotter than housing and if the latter stumbles, so will the former."} Consider too, today's Financial Times with Uneasy Calm Settles over US Housing Market, including:

... the vital importance of housing to the US economy means financial markets will stay alert to even the faintest signs of a slowdown. Estimates suggest that as much as a quarter of the increase in consumer spending last year was due to rising house prices. Residential investment in the US now accounts for 6 per cent of GDP, the highest level in 50 years and a much bigger share than in other countries.

"While the US boom is not the biggest seen internationally, the economic impact of a bust could be among the most severe," says [Paul Ashworth, analyst at Capital Economic].