2009 will be a year to forget. Governments were still reeling from the 2008 financial firestorm that threatened to engulf the established economic order that had successfully underpinned the lifeblood of world commerce since 1945. They stared into the abyss, decided they did not like what they saw and coordinated on a worldwide scale to inject trillions of dollars to primarily re-liquify the functioning of the banking system. That was the story for the first three months of the year...
It worked...or so it would appear. Very quickly, financial and stock markets regained their footing and emerged like a phoenix from the ashes of despair. In April, a change in accounting standards by the US Financial Accounting Standards Board (FASB) gave the big banks a free pass not to "mark-to-market" the value of their assets, effectively amounting to another covert bailout by not needing to fully disclose the paper losses of their shredded investments (eg residential and commercial estate mortgages). The much publicised "stress-tests" which virtually every bank passed in May were but a charade behind the more critical FASB decision. By the end of June, stimulus money triggered new asset bubbles from US Treasuries to China residential property as the world banking system quickly set about liquifying the entrails of a battered private sector. Today, the US banking system still prefers to hoard much of the stimulus money and not lend out nearly as much to the private sector as the US government would like. 140 US banks have failed in 2009. In contrast, China's banks have been lending with gay abandon, albeit mandated by central government dictates.
The major industrialised world economies have been bingeing on a sugar-high. Towards the last three months of 2009, there has been an emerging, though so far relatively sedate, groundswell of opinion that all is still not well. Troubles are brewing with the PIGS (Portugal, Ireland, Greece and Spain). Latvia and Ukraine have not followed through with the IMF medicine and remain a tinderbox in Eastern Europe. Dubai's crisis briefly threatened...and then disappeared. At some point, governments will have to withdraw the stimulus and interest rates have to go up because there is simply too much money sloshing around the world financial system and the fear is some external (unforeseen?) factor can trigger off a new inflation that will spark out of control (recall 1920s Germany, 1980s Argentina and 2000s Zimbabwe).
We enter 2010 on a more hopeful note but caution still reigns. The US being the engine of the world economy is now characterised by unprecedented government debt levels which will span generations to pay off :
The financial markets may have shrugged off this awesome multi-trillion US$ cashflow deficit generated in just one year but the voices of wise old heads linger. The following clip is a montage, by popular vote, of Yahoo Finance Tech-Ticker's favourite pundit in 2009 and he does not mince words.
How does this translate at the street level? In China, even with authoritarian measures to spur and maintain "social harmony", mass riots by the populace can go largely unreported in the mainstream media. In downtown US cities, there are new stirrings as increasing numbers find themselves homeless through housing foreclosures and now seek social assistance. The following is a media nugget on how one of Obama's new welfare stimulus programmes affected Detroit, spiritual home of Motown and today's GM (General Motors).
The message for 2010 must be for governments to slow down, rein in their profligacy and educate their people on self-reliance and taking personal responsibility. Easier said than done... Paul Volcker, a Fed Chairman from 1979-1987 did it before Alan Greenspan replaced him. The guy had the courage to raise the Fed funds rate from 11% in 1979 to 20% in 1981 (its at 0 - 0.25% today under Bernanke). This policy brought on the highest unemployment since the Great Depression but he tamed the economy and its string of historic malinvestments. As the current head of the President's Economic Recovery Advisory Board, his is the lone voice of wisdom that must carry the message thru to Obama's ear in 2010.
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