Enzio's Update

It hardly needs to be said that the global economic situation is growing more worrisome by the day. Although governments across the planet are stepping up measures to ward off the worst of the financial crisis, from a structural perspective, they can only be of limited use. As the economist Robert Samuelson wrote today, “Private behavior is neutralizing public policy.”

Indeed, The Economist’s editor, Walter Bagehot (1826-1877) arrived at the same conclusion in London’s City when he said that any money given to central banks was not finding its way into the private sector. Thus, the current Economic Time™ is characterized by an excess demand of money. But the reason that central banks cannot create an excess supply of money is because commercial banks are the ones who refuse to lend. Only once they regain confidence can an excess supply of money be created.

So current measures are at best, bail-outs. Sadly, it seems as if politicians are privatizing the gains and socializing the losses in areas such as the US car and banking industries. Thus, I am not criticizing governments for acting; it’s just that their room for responses is limited.

As to my expectations for how deep the recession is expected to be and what its impact will be on financial markets, how long is a piece of string? My guess is that the world economy is going to “L” and stay there until at least the end of 2009. Indeed, I have likened the current state of the market to that of a fish flopping around on a hot cement sidewalk (as opposed to a cat on a hot tin roof). I do not expect lenders to budge for a long, long time.

The Federal Open Markets Committee next week is likely to deliver zero rate policy and more quantitative easing from Fed Chairman Ben Bernanke. As Samuelson points out, “”The Fed’s new loans and credits easily exceed $1 trillion.”

Whether it will do any good is debatable. The global Economic Clock™ will keep showing an excess demand for money and thus an excess supply of goods.

The current bailout packages are creating scary consequences down the road. On the fiscal side, the US federal budget deficit will balloon above its already scary levels. On the monetary side, the Fed has moved far beyond being a lender of last resort. In fact, it now looks like a hedge fund with a) the most toxic assets and b) nobody who knows how to run this hedge fund!

Enzio von Pfeil studied in Freiburg, Germany, under the Nobel Laureate Friedrich von Hayek. After working for some of the world’s leading investment banks, he now manages his own stock portfolio. Dr von Pfeil lives in Hong Kong. His tool is the Economic Clock, a series of economic principles that can be found at http://www.enziosclock.com/economic/clock. Asia Sentinel presents, on an irregular basis, Dr von Pfeil’s concerns about the regional and global economies. For additional articles, statements and studies by Dr von Pfeil, please visit his website at http://www.enziosclock.com/