E We Are Trapped In A Phase Of Major Unknowns


In some respects, the US economy can be considered a proxy for how the global economy will respond over the next couple of years to a series of significant economic problems. 

Virtually all forecasting groups acknowledge that the US and global economies are in a perilous situation. 

And in many respects the rather weak and volatile equity markets still do not fully recognize the seriousness of the current economic downturn, and the likely consequences of a slow and uneven economic recovery. 

What we do know is that the covid-19 lockdowns which savaged the US job market and household spending, and which triggered a massive economic downturn, will soon morph into an extremely weak economic recovery. 

There is no way that the comfortable US economic status quo which existed in February of 2020 can be restored even before the end of 2021. Indeed, the evidence is extremely compelling that the US is moving into a long and painful period of slow growth, low inflation, and high unemployment.

Nonetheless what we can anticipate with a fair degree of assurance is that the US Federal Reserve will maintain near zero interest rates and massive liquidity purchases at least through to the end of 2021.

Indeed, the other large central banks which will be dealing with similar sluggish economic recoveries will follow the same lead in terms of providing liquidity and financing their huge government deficits.  

We can also anticipate that at some time next year the US government and Congress may try to limit the budget spending side, even if Democrats are in the White House.

Finally, as to the general state of markets, it is important to underscore that the Federal Reserve has openly committed to keeping the economic revival going no matter how long it takes. 

Since over the next couple of years money market interest rates will remain unusually low (very close to zero), as with wage and price inflation virtually absent, the extremely volatile equity markets will continue to seem to be the only real investment option for retail and institutional investors. 

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Arthur Donner 2 months ago Author's comment

I beg to differ. The risk we face is deflation, not inflation.

William K. 2 months ago Member's comment

Certainly all of the markets will take a lot to recover, and the fed pumping lots of money in can not help but fuel inflation, which is the enemy of value.

It does not matter how good the intentions are, making the wrong moves will cause damage. And printing money by the train[load is certainly a wrong move for most folks.

Diluting the value of what wealth I have works to destroy the value of what each dollar can purchase, and thus it does not deliver any benefit to me. Why is that so hard for some to see??? Runaway inflation does not benefit most people at all, quite the opposite.