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Fear subsides, prices rise (18)




I keep coming back to this chart, which I have shown many times since Nov. '08, because it has done such a good job of explaining both the origins of the great financial panic of '08 and the mechanism for recovery. The whole mess got started because the world feared the collapse of the global banking system. Fear, panic, doubt, uncertainty—all the things that drive the Vix index—spiked to epic levels, and as a result, spending and investment ground to a halt. Then came the Obama panic of early '09, when he called for a trillion dollars of faux-stimulus spending and trillion-dollar deficits for as far as the eye could see, which in turn deflated markets as they contemplated a massive increase in future tax burdens.

As the financial markets gradually healed themselves, with help from the Federal Reserve's (belated) decision to provide essentially unlimited amounts of liquidity to the system, the fears started to dissipate, the spending began to restart, the global economy began to make a comeback, and the price of risky assets began to rise. Although this recovery process has been underway for almost 17 months, we have still not fully recovered, and we are still living under the threat of out-of-control federal spending and its eventual consequences. But we are making progress, and the progress should continue, especially if the electorate in November expresses a strong desire to return to fiscal discipline, as I think it will.

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