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The next boom of the Global Markets and economies

The global economy is in the doldrums. Collapsing housing prices and ensuing foreclosureshave brought both borrowers and lenders to their knees, frozen credit markets, depressed stockprices, softened consumer demand, forced oil, metal (even gold) and other commodity priceslower, and now dragged down the commercial real estate market as well. The Bush andPaulson $700 billion financial rescue plan has morphed from an impracticable illiquid-assetbuyback plan to shore up bank balance sheets into an across-the-board equity infusion schemeand sadly, along its porky way, lost focus, impact and credibility. Cynics question what benefitBernanke's many years of academic study of the Great Depression have brought him, oranyone else, for that matter. Respected business figures (for example, Soros and Dimon) warnof a deepening recession in 2013, possibly even a depression.

Given the dour outlook of economic experts and pervasive pessimism of the investing public, it'shard to be optimistic--but I am. I'm confident that better times and a stronger economy lie aheadof us. Really, a brighter future is all but inevitable. Yes, I repeat, just as day follows night, we willsee better times. Let me explain the root of my optimism.

Keynesians and neo-Keynesians, fiscal measures

Generally speaking, two basic schools of economic thought have been most influential over thepast 75 years - - Keynesians (including neo-Keynesians), who advocate fiscal measures suchas an increase in government spending to stimulate a sluggish economy, and higher taxes tocool an overheated inflationary economy; and monetarists (led by Friedman's Chicago school),who believe that what's more important is controlling the money supply, primarily through buyingand selling government bonds in the open market and raising and lowering the discount rate.Both schools of economic thought unabashedly lay claim to real-world successes of theirmodels--Keynesians take credit for lifting the economy back onto its feet through FDR's NewDeal spending following the Great Depression in the 1930s, and monetarists boast of steadyand prolonged economic growth in the 1980s (Reagan years) and 1990s--despite the manyrecessions we have seen, including those in recent decades: 1980 (7 months), 1981-1982 (17months), 1991-1992 (8 months), 2001-2002 (12 months), and presumably 2008-2009.

Bernanke's pushing the discount rate

While these two mainstream schools of economic thought certainly have their differences, theyalso share an important commonality - both rely heavily on government intervention to control orat least influence economic growth. President Bush's consumer-targeted economic stimuluspackage during the early days of the current financial crisis and the new stimulus package that

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President-elect Obama stressed as a high-priority item in his first press conference a week agoare examples of Keynesian policy in action. The Fed's continual "busy-body" adjustment of thediscount rate--Greenspan's lowering of the rate to 1% in 2003 during the last recessionprecipitated by the dot-com bubble, and raising it back up to the 5% range by the time of hisretirement in 2006, and all the way back down again to 1% last month, while hinting at more ratecuts to follow--are examples of attempts to steer the economy using monetary policy.

The Austrian school- government intervention is not the solution

In sharp contrast to these two mainstream schools are those who argue that both theKeynesians and monetarists are wrong-headed. For example, the Austrian school , based onthe thinking of Mises and Hayek, explain how government intervention is not the solution.Stating that fiscal and monetary policy fail to produce their intended impact, these economistsinsist that, instead of smoothing the vagaries of the business cycle, government interventionactually causesthe booms and busts, through over-extension and over-contraction of credit atartificial prices via the highly government-regulated fractional-reserve banking system. Quitecontrary to active intervention, the Austrian school recommends following a laissez-faire "donothing" approach, theorizing that this is the only way to cure permanently our economic woes.

Which economic school is right?

Well, first off, practically speaking, it would be grossly out of character and, in fact, outrightpolitical suicide for any president--whether lame-duck Bush, or our country's new icon of hope,"renegade" Obama--to tell us American citizens that, after serious dialog and lengthy reflection,the elected officials and their appointed experts have decided that a "do nothing" policy is best.With home foreclosures at historical highs and rising, and growing worries over burdensomecredit card balances, auto loans and other consumer debt, the popular approval ratings of eventhe most charismatic of political leaders would undoubtedly suffer greatly if all their economicadvisory team could come up with is to a "do nothing" strategy for tackling the current economiccrisis. No, simply put, Americans are by nature more active doers than thinkers, and doing

nothing never has been and probably never will be an acceptable alternative for managing oureconomy.So, much to the chagrin of Austrian school economists, we must conclude that governmentintervention, whether effective or not, will continue when Obama and later presidents take office.Given this inevitability that politicians and their mainstream economic advisers will always beinclined to fiddle with the economy, here's the logic of what to expect:

If the sketchy long-run track record (performing like a "B" student, with 13 out of the 115quarters beginning in 1980 showing negative real GDP growth, according to BEA data)of the Keynesians and monetarists is any indication, we should see at least somedegree of over-shooting in the future, perhaps this time manifested by a delayed butsudden response of our economy to excessive fiscal stimulus or overly loose monetary

policy, resulting in either consumer price inflation or yet another asset bubble. (On theother hand, if by chance (or fluke?) policymakers have learned from the last boom-bustcycle and this time around manage to get the economic fine-tuning exactlyright, they willhave realized the heroic feat of taming the recalcitrant business cycle, macroeconomicvolatility will cease, and we will all live, at least economically, happily ever after. . . . but Iwould tend to believe other fairy tales before placing undue faith in this one, wouldn'tyou?)

If the Austrian school is correct in their critical analysis of the shortcomings of Keynesianand monetary policy, the current credit-driven bust will inevitably be followed by a boom,

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and the more our government intervenes to try to fix the problem, the higher the crestand deeper the trough we will see during the next boom-bust cycle.

In other words, however we dissect our economic situation, the business cycle remains aliveand well. Both empirically and theoretically, we can be sure that economic booms and busts willcontinue. Admittedly, the precise timing is anyone's guess but, following the current, painful de-

leveraging and retrenchment of credit in our financial system, at some pointin the future, creditcreation will again be in vogue, creating over-expansion of credit in some asset class, and soonenough spilling over into other asset classes. Yes, however unlikely it may now appear to be(case in point: was anyone predicting a collapse in oil prices to today's $58 per barrel when itsoared above $140 as recently as July?), one day we will experience yet another bubble.Seeing how the collective memory of market participants tends to be selective and short, Iwouldn't be surprised if such a rebound happens earlier and quicker than any respected marketcommentator would now dare to predict.

Suffice it to say, for anyone distraught by the current bust, please have patience: thenext boom will come--maybe even sooner than you or anyone now thinks.

Mircea Halaciuga, Esq.

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