Adler on Data Governance
From archive: January 2009 X
Last week, a friend sent me a Merrill Lynch analyst report that forecasted oil prices reaching $12 to $17 a barrel in the next year. Today, the price is about $35, which is way down from the $142 it reached last summer. Of course, oil prices are an indication of global economic demand and in a recession, one would expect oil prices to recede. Many oil companies have benchmarked their investment strategies based on oil at $70 a barrel. Of course, $142 resulted from a speculative bubble, but what does oil at $12 tell us?
It tells us that we are going to experience a period of deflation, which is very dangerous for the global economy. A recession plus deflation doomed the Japanese economy to stagflation for a decade. This experience remains on the minds of policymakers today. The remedy for deflation is inflation, which is exactly what you get when you cut interest rates to 0%, inflate the balance sheet of the Federal Reserve Bank, and spend trillions on economic stimulus programs.
I said trillions. Obama has "only" asked for $850 billion so far, but that amount alone won't rescue the American economy. The global economy is falling off a cliff right now. All of our trading partners are experiencing, and will experience, economic conditions harsher than the US. And all of them are dependent on the US consumer resuming spending to lift the global economy out of the near-depression state we will enter by summer 2009.
We are still working off the market fear created by the capricious decision of the US Treasury to allow Lehman Brothers to fail. That fear extends from Wall Street to Main Street, and the foolish waste of the first half of the TARP has done little to abate that fear. I can still remember Hank Paulsen telling CNN in early December that there was no need to tap the second half of the TARP's $350 billion because the first allocation had stabilized the credit markets and no further bank disasters were anticipated. Less than a month later, Hank had to eat those words and ask for the other $350 billion to bail out Bank of America and prepare for some mid-tier disasters yet to come.
What does all this mean? It means no one knows what will happen next. There are no magical economic crystal balls that fortell what is to come, how much is needed, when it will end.
But I will make my own forecast.
1. The government will spend close to $1.5T in economic stimulous over the next 18 months to revive the US economy.
2. The spending will deflate the US dollar and lead to high inflation that will endanger the economy.
3. To counter a deflated US dollar and high inflation, the Federal Reserve will have to increase interest rates in large jumps, which will be very unpopular and will place a new shock on business development.
4. Obama will try to postpone the interest rate rises until after the 2010 congressional elections and hope that the economy stabilizes and rates can be reduced before the start of his re-election in 2011-12.
5. One consequence of the economic strain will be military de-committment abroad. We can't afford it.
6. Another consequence will be a garage sale of US real-estate and other assets to foreigners with strong currencies over the next 18 months.
But no one has a magical economic crystal ball, and exact timing can't be predicted. What can be assuredly predicted is that most Americans have no idea how serious the current economic environment is, and nor do most understand how much sacrifice will be expected of them in the next 18-24 months. This period will test our new leader and our democracy.
Sorry to be so gloomy on Inauguration Day.