Thursday, 24 September 2009

Hayek About To Be Proven Right

As I write my first blog post the US dollar is strengthening and everything else priced in it is weakening, particularly stocks. This is a theme that has continued since last night, when it was revealed that the Fed would slow down its mortgage backed securities and agency debt purchase programme. If they are true to their word (and don’t announce an even bigger monetisation programme), this trend of asset price deflation will continue for a long time to come.

It seems that traders are better schooled in Austrian economics than I gave them credit for, having clearly read Hayek’s work - specifically, his contention that when monetary stimulus is slowed, never mind being withdrawn, recession-like symptoms in the economy emerge. I think he is about to be proven more right than even he would have wanted. The global economy (in particular the US and the UK) is in dire straights (more on this later) and we remain stuck in the early stages a depression that will play out in its entirety regardless of the actions of the Fed or anyone else. The reason is too much debt and too much malinvestment, and all the policy efforts so far have done is delay the day of reckoning, while ensuring that it will be even harsher than it would otherwise have been.