Fri Apr 25th, 2008 at 03:27:10 AM EST
Mohamed El-Erian in the FT is expecting the real economy to have its revenge on the financial system shortly:
Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption. During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.
Economic data in the US have taken a notable turn for the worse. Most im portantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses.
Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.
Well, if you will run a system based on the idea that you can spend beyond your means indefinitely ...
I'm not sure it's fair to describe this as the real economy contaminating the financial system: the consumers have been living beyond their means precisely because they were encouraged to and taught to by the financial industry.