Holding Pattern

In a discussion with International Man's Managing Director recently, I grumbled that those authors that are normally quite glib on the future of the economy seem to be going silent. They either are not writing articles, or if they are, many tend to be rehashing their previous articles.

I think it’s safe to say that they have not come to the conclusion that the subject of economics has become uninteresting and they are now writing romance novels. Truth be told, I, myself have been a bit stuck, and the reason is that I believe we are at a major economic crossroads. We have all been talking about it and anticipating it for several years, and we appear to have just walked around the bend and have discovered the crossroads right in front of us.

In recent years, we have repeated extensively what the possibilities are and what we believe the certainties to be. We have been sitting at the poker table with the pot growing ever larger and now we are staring across the table at the fellow with the beard, waiting to see if he is going to call. We can imagine our opponent laying down his cards and saying, “QE3.” But for now, we can only draw a collective breath in anticipation.

The next move may be the deciding point in the game. The economy is on the ragged edge and the Fed is hanging on by its fingernails. They have sworn not to implement QE3, yet the Fed Chairman has recently announced nervously that this position might be the teensiest bit overstated. (Was that a pin you heard dropping?)

QE is morphine. The economy crashes and the morphine is pumped in to keep the patient alive until he recovers well enough that he doesn’t need it any more. The “doctor” has stated emphatically that one and possibly two injections of morphine may be acceptable, but that a third could be fatal. Now the patient has had two injections and the patient is only marginally better. The doctor is now saying that maybe a third injection might not be all that bad.

QE1 and QE2 have failed miserably. Gold has risen to $1600 in spite of all efforts to discredit it. The debt level is so significant that there is little chance of prosperity again for at least a decade. The slipping of the Dow is suggesting a second crash... (That’s enough, let’s stop there.)

A natural collapse of the economy has been postponed since 2008 to such a degree that the fragility of the “recovery” is now so palpable that even the guy in the street feels it. He may not understand it, but he feels the hairs on his neck sticking up. At this time, the fear of collapse is so pervasive that very little would be necessary to bring the whole house of cards down. At times such as this, even a false rumour could trigger a panic. Until now, we have had controlled chaos. Very soon, the rough part of the ride will begin.

As investors, we are all aware of this and the Fed knows it too. If QE3 (or some euphemistic alternate plan) is not implemented within a very short time, a collapse could occur at any time, on the strength of rumour alone. However, if they do implement it, those members of the general public (the vast majority) who may not have known much about economics, but trusted the fellow with the beard, will realize immediately that the recovery was, and is, a lie.

Small wonder there is uncertainty amongst economists. The final outcome is, I believe, a certainty. What is uncertain now is which road will take us there. The slower, rocky road down of QE3, or the steeper, but, ultimately, less destructive road of no further governmental intervention. Once the Fed has announced which road it will take, speculation will once again go into high gear. For the moment, we must wait.

Tags: debt,