Tuesday, August 25, 2009

Thesis on the Market Recovery

It's been a few weeks since Warren Buffett's op-ed piece, "The Greenback Effect". Obviously the concerns being portrayed are one of a depreciating US currency. I personally see this as being only half the story.



I personally believe that most of the developed world is building a Ponzi scheme of debt, financing each others' ambitious infrastructure plans that will save capitalism from collapse. I don't doubt that this will have been the best approach given the circumstances in the marketplace at the time (frozen credit markets and a catatonic consumer base).



I theorize that the US currency may not fall versus most currencies worldwide, but most currencies will depreciate against hard assets and useable commodities, like oil, copper, etc. With the flood of cash, and some evidence that the credit markets are thawing (see the 750,000 cash for clunker deals that have taken place - at least some of those had to be financed), I expect that the velocity of cash will accelerate quickly through the economy, increasing demands for credit, in order to "get ahead of the curve". As companies will start showing increasing profits and revenues through this "cheap cash", the cash will continue to produce increasing cash through the marketplace (courtesy of the economic multiplier). This cash won't generate jobs as quickly as people anticipate - the market is not quick to bring jobs back into the forray, but productivity gains will continue to increase. The middle class is squeezed by the fact that jobs don't return as quickly as the economy does, and the price of goods increases by worldwide demands. Therefore, middle class individuals lose on two counts: less job stability and inability to increase compensation at the rate of inflation. Until we reach full employment, middle class employees are squeezed, and their wealth is reduced in real rather than nominal terms.

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