Joshua Zumbrun On U.S. Business And Economy
The Big Trend
The Federal Reserve is terrified of deflation. Ben Bernanke is prepared to take massive steps to head off a fall in prices that would cripple the economy. The Fed will, first, likely succeed in heading off deflation and, second, will almost certainly overshoot the mark. It would view a return of inflation as a success. Indeed inflation would be far better than a couple years of deflation, but it will present a raft of new challenges. No matter what it does, the Fed and U.S. monetary policy are likely to emerge as incredibly unpopular.
The Unconventional Wisdom
The recession will be the worst since World War II. It will officially be the longest if it lasts through April (nearly inevitable). Unemployment usually peaks after the economy has started to recover, so inflation will become a concern before unemployment returns to tolerable levels. To control inflation, the Fed will have to raise interest rates on a weak economy. A possible scenario: the current recession lasts 22 months, and a short expansion begins near the end of 2009. But before long, another recession (with luck, shallow), is created by the Fed raising interest rates to choke off inflation. “Incredibly unpopular Fed” might be an understatement.
The Misplaced Assumption
That after bottoming, house prices will be sluggish for years. Maybe not. Beginning in 2005, many savvy people who could comfortably afford a home have kept real estate agents at arm’s length. Thus four years’ worth of creditworthy buyers are ready for their white picket fence. When they begin to re-enter the market in 2009 and 2010, excess housing will disappear quickly. When normal buyers and sellers return, prices will jump sharply off lows before finding a stable plateau.
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