Recession 2008?
Fiscal and monetary policy are aligning to create a new round of inflation and drive up stock prices relative to a weakened dollar.
Monday's brief downturn was followed by bullish activity, and the days following have been more of the same.
The federal reserve's interest rate cut is likely to draw the dollar down over the next six months unless international central banks begin to lower their own interest rates or purchase dollar-denominated assets.
The Fed is sending a clear signal to the investment markets and the companies seeking profit growth: Borrow. Build. Forget the debt, we can make it easier to pay off.
In May or June, the Governemnt will weaken the dollar more with tax rebates.
Aside
from monetary policy, the other major factor that contributes to
falling currency prices is government fiscal policy - in this case,
budget deficits.
The bipartisan stimulus package will be funded
with about $150 billion borrowed dollars. This fiscal policy will
hasten the fall of the dollar in 2008, and it will start to really have
an impact when that rebate hits the consumers and retailers raise
prices.
Stocks outside of sub-prime markets are set to rise rapidly
This weekend we witnessed a global shake-down in the stock markets.
Big equity holders are aware of the declining value of currency but the
talk of recession and economic slowdown is usually the type of talk
that scares people out of stocks and into cash.
The best bet is
to get out of cash immediately, or at least out of American currency.
The money is better invested in stocks, gold, other commodities, or
even foreign certificates of deposit. This is why the markets are
going back up - the hope for more interest rate cuts and inflation
means that as bad as it gets on Wall St, its not going to be as bad as
what happens to Main St.
The rate of return on American bank
CDs, government bonds, money market accounts, and savings accounts are
unlikely to break inflation in 2008. Stock markets may not go up in
real dollar terms, but since the government is going out of its way to
save the investors, its going to be a better inflation hedge than
dollars themselves.
Recession 2008?
For a lot of people, it probably will be. Businesses are still
tightening, hiring is down, construction is at a stand-still, and
prices will continue to go up.
CPI will likely distort reported
inflation again, hiding behind substitutions and low weights in
"volatile" products, but GDP growth will be significant as well.
Whatever the actual ratio of growth to inflation is, the government
will report the CPI so that there is "no recession." Right now,
consumer and investor confidence are key to preventing a more serious
problem. Rising stock market prices and new inflated GDP numbers will
contibute to maintaining this positive economic sentiment.
Of
course, toward the end of summer, the investors are likely to pull
their money back out of the market, popping yet another bubble, and
pushing for new election-year economic packagaes.
