The End of Economic Exhuberance

The markets as predictions of our economic future have spoken (are speaking might be more accurate) and appear to think the stimulus spending plan … won’t do much.    Optimists can note however that they also are not predicting a finanacial catastrophe – rather we seem to be resetting a lot of economic indicators (DOW, SP, Home Prices, etc) to the levels of ten years ago.

The tendency of economic forces to reset the whole show to 1990’s levels actually makes a lot of sense to me, and a quick look at stock index charts suggests that we may be seeing a very simple thing right now – resetting many metrics to the values they would have if we had simply skipped the economic exhuberance era and grown the economy the good old fashioned way – with real rather than paper wealth.   I’m not saying the big upticks in the indexes and housing were not “natural” – in fact i think they were the natural extension of several factors including reduced regulations (a small factor IMO), personal trading stock investment frenzy (a big factor IMHO), and the speculative real estate bubble combined with low interest rates (the key factor IMO).

As details of the TARP and stimulus plans come out I think many pundits are starting to see what most regular folks have known for some time – the economic groundhog saw his shadow and we’re looking at a lot more economic bad news and trouble before the sun shines again.   But the indexes are predictors of the economy of the future so I think people should not look for things to spring back anytime soon – once we have “reset the economy” to a reasonable level we can reasonably expect things to start growing again at modest historical rates rather than with the exhuberant frenzy of the last 10-20 years.

Is the stock bloodbath over yet?   I’m guessing pretty much yes – we have now about halved the indexes from their highs and returned to the places we’d be without the bubble, and the trillion about to be pumped into the economy will at least add that much to the GDP yielding a modest and expensive but noticeable positive effect.