by Charles Biderman
Several of you have asked what happens afterwards. What happens after Europe, the markets and even the current U.S. miasma ends? Even my wife asked me that question. Well, what I see is deflating assets and inflating commodity prices.
Here in the U.S.-- when the Bernanke put dies-- prices of assets such as stocks, businesses and particularly government bonds will deflate. Without the Fed having given trillions of newly printed money to bankers and brokers, stocks and bond would be lots lower in price. On the other hand, commodities priced in the U.S. dollar will inflate in price. Inflation happens when commodity producers decide that the U.S. dollar is worth less than one dollar and want a higher price to accept a deflating currency in payment.
Deflating assets and inflating prices is not a pretty picture, is it? The sort of good news is that Europe will get there ahead of us. While in the U.S. the main casualty will be asset prices, in most of Europe, their entire welfare state based economies will need a do over. Fortunately, in the U.S. the welfare state is nowhere near as entrenched as in Europe. My guess is that there will be major outbreaks of violence as Europe's so called safety net unravels.
Here in the U.S. and in most of the emerging world, there is a vibrant online business community. Former Fed chief Alan Greenspan often spoke about a productivity boom. Some now say that the productivity boom was really the result of huge increases in borrowing by individuals and countries. No doubt leverage aided the productivity boom.
But there is no question that a broadband world is much more efficient, productive and robust than anything that existed before. That is why, to me, online activity such as this can help prepare the way for the post modern world. Post modern meaning that the bulk of global economic activity will be based on online interactions.
Home prices were the first asset class to collapse. Home prices, at least for the lower two thirds of the market, are probably either at the bottom or are near enough to win at horse shoes. Stocks, which peaked at a global market cap of $61.5 trillion in October 2007, dropped by almost 60% to $25.5 trillion at the March 2009 low and are now up almost double from the 2009 low-- to $46.5 trillion. A post Bernanke put global stock market obviously will sell off. How far, who knows.
We will be at the bottom when governments admit that printing money has become a bigger problem than propping up asset prices. At the bottom the U.S., Europe and Japan will be forced to restructure government debt and entitlement obligations. The new world will have localized safety nets based upon individuals and communities stepping up. The current emerging world, particularly China, Brazil and India, will undoubtedly gain market share in terms of stock market capitalization.
The bottom line is that after all the excess government garbage is removed, the world will go on.
Disclosure: No positions