- The US recovery from the 2007–2009 recession has been particularly disappointing, in part due to the moribund state of the housing market.
- The state of the housing market is in part a symptom of excess leverage, the US’ core concern.
- Excess leverage will continue to weigh on US economic growth, restricting it to a sub-trend pace for the foreseeable future, resulting in a need for further QE.
….. Given the size of the US’ debt stock and the lack of assets set aside to fund future pension liabilities, it is logical to conclude that above-trend growth conditions are a long way off. In the meantime, households and government authorities will remain heavily exposed to any further deterioration in conditions, whether it be domestic or foreign (i.e. Europe) in origin.
QE3 will be needed merely to help protect against a further deterioration in economic conditions. Such a program would have to be large in scale and in coverage, likely covering USTs, mortgage securities and, with time, the existing debt of SLGs.
A final point: the degree of easing required to alleviate the financial stresses the US economy currently faces (and hopefully at least maintain the current level of activity) has not been recognised by markets. Given the precarious state of Europe, the market will likely take its time in coming to terms with the US’ own concerns. But, when the spotlight falls on the US, we expect a greater awareness of US credit risk and the absence of near-term growth prospects will see yields rise and the US dollar fall.
Once upon a time long long ago in previous centuries there were no pension funds. If you could not fight and find your daily subsistence – YOU died. Now with 9 Billion people scratching at the limited resources of the globe and unless you live in a civilized country and have money – YOU will die.Such is life. But in the mean time make money. Life is such a funny game.
Where do you get time to write so good articles?