Monday, September 26, 2011

How to Jump Start the System: See Newton's First Law

Newton’s First Law Of Motion: Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.

Some of the best analysts we follow have described the economy as a barge that is very slow to turn once it has a direction and some momentum behind it. Lately that barge appears to be headed in a negative direction, and picking up speed. We’ve seen this in a variety of leading indicators of growth, employment trends, and confidence -- the latter of which has all but vanished. Add in political dysfunction in the U.S and Europe, questions regarding the effectiveness of monetary policy, and liquidity tightening in the emerging world, and the momentum for a negative economic feedback loop to develop is building.

Currently the question policy makers are struggling with is how to reverse engines and get the barge to turn back in a positive direction. As Newton said best, we are currently in need of a strong external force, and preferably one that is turbo charged for this environment! One possible solution would be a globally coordinated intervention of sufficient magnitude. Back in 2008, such a coordinated effort helped to stabilize credit markets and jump start growth, and it might do the trick again.

As the expression goes, this is easier said than done. In 2008, there was arguably more gas left in the monetary and fiscal tank than there is now, and there was also much less political baggage to contend with. Over the weekend, there were some positive signs that global monetary and fiscal authorities are waking up to the gravity of the current situation, and I sincerely hope a credible plan of sufficient magnitude arrives soon. But with rumors running rampant, and rhetoric still cheap, we will remain skeptical and defensive until we see action that we believe is worthy of being a game changer for the current cycle.