Economic Scenarios for 2013 and 2014
The growth of the US economy in the late 90’s and early 21st century was sustained by the consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that were well above the equilibrium level.
Consequently, we must monitor asset prices – not just consumer inflation or nominal gross domestic product.
It should be axiomatic that no financial institution is too big to fail. We need to withdraw the privilege of limited liability from financial institutions.
After a long period of bond yields at low levels, investors have finally awakened to the threat that open-ended monetary stimulus from the Federal Reserve cannot last forever, with significant consequences for the fixed-income market. Furthermore, performance of investment-grade debt changed from a total return of 1 per cent for the year back into negative territory for the year during the final weeks of May, showing how a big jump in Treasury yields can ripple across other asset classes.
Consequently, we will shortly be confronted with unwinding the QEI and QEII which Mr Bernanke has put in place.
Yet, we will still be vulnerable to another financial crisis unless banks return to fundamentals and the regulators get off their backs. The fundamentals are the Five C’s of Credit, which have not changed over the past millennia: character, capacity, capital, conditions and collateral.