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 This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

I'd say that's wildly optimistic given his predictions for the meltdown of large swathes of the banking market, and collapsing consumption. I'm not sure it's goin g to be U- or V-shaped, but it's going to last a lot longer than this. There's just too much cleanup needed, and the way down always destroys more than would be purely needed just to eliminate the accumulated imbalances: there's an overshoot on the way down too.


 Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.

That's similarly optimstic. I still expect the Dow Jones to go down to 4,000.


The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession.

I'm still not convinced of that, but time will tell. Many economies, especially in Europe, were not really pulled up by the US during the "boom" times, and I think they will be similarly insensitive to the US and UK crunch. And emerging economies are linked to the EU as much as they are to the US (witness Chinese exports, for instance) - notto speak of their own growing spending. Note that the Middle East and Russian oil exporters mostly spend their money in Europe.


Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

What "bubbly" peaks? But given that whatever the level of oil prices, people predict that it's a "bubble" and that prices should go, or will go 20% lower, this is an essentially meaningless prediction. I'm happy to stipulate that we'll regularly see oil prices 20% below a recent peak at various times...

Available exports of oil are shrinking as producers burn more and more of the stuff at home.


The Fed will have to cut the Fed Funds rate much more - as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.

It's called (as per Keynes) pushing on a string. I tend to agree with him that the US will choose inflation and currency devaluation as the most discreet way to default on their burdensome debt, but the risk is indeed that of a continued drop in the dollar, and the corresponding rising long term rates (those not set by the Fed) once this goes too far.

But his points flaggin the risk to the regional bank system, the unsustainability of the big US investment bank models, and the risk of an overall financial meltdown are quite in line with what I epxect too,yes.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jul 16th, 2008 at 10:55:50 AM EST

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