A rather sober tale today.. just in case I need to say 'I told you so'. Here are links to a few posts that show where I think the world is at and where we're headed.
First, Steve Keen, an Australian un-conventional economist, is recognised in a research paper for being amongst a select few to anticipate this credit crisis:
July 2009: No One Saw This Coming? Balderdash!
The cornerstone of Steve Keen's argument is built around the above long-term chart. Credit as a proportion of GDP has rarely been stable - periods of credit (debt) expansion have been followed by deflationary 'busts' in the late 1800's and then more famously in the Great Depression. Increasing credit (debt) as a proportion of GDP is inherently unstable - we've simply been blowing one bubble after another for too long now. The problem is that conventional neo-classical economic theory does not recognise the role of private credit in the economy, but private debt has become so significant that it IS the economy.
So this credit (debt) crisis has been more than half a century in the making and it will not be solved in a matter of months. We have to find a way to create a sustainable economy, with consumers spending within their means (and the capacity of the planet and its resources). Getting there will not be easy.
Neo-classical economists (that's just about everyone in Government and everyone else you've ever heard of) didn't see the crisis coming, but they think they can see 'green shoots of recovery'. Balderdash again says Steve Keen:
July 2009: Debtwatch 36, July 2009: It's the Deleveraging Stupid
Stoneleigh and Ilargi at 'The Automatic Earth' have been writing along a similar line since August 2007, well before most people understood the depth of the crisis we were heading into. Here's their November analysis of the deleveraging of credit that is leading us towards deflation:
November 2008: "Inflation" Deflated
Building on analysis by Stoneleigh and many others, I wrote this piece for 'The Oil Drum' in October 2008: Oil, House Prices, Credit? Three parts of the same story
In a nutshell, I'm with Steve Keen and Stoneleigh. I think we are in for a serious bout of deflation, something entirely unknown to most of us. The stockmarket recovery could go on quite awhile, but will not last. We could easily fall below the lows of late 2008 and early 2009. The next stage of panic will be accompanied by a flight back to the safety of the US Dollar, which may see the Aussie dollar fall sharply again. What happens to currencies beyond that really is anybody's guess.
The future is hard to see at the best of times, but I'm banking on the majority being wrong; again.
Two previous posts:
October 2008: The Bill for our Party is Now Due
August 2007 (can you remember how rosy the world looked back than?): Shares Slump and Credit Crunch: Passing Peak Oil