Monday, August 8, 2011

Dead Cats, Bouncing Down the Stairs

We've had an extraordinary sell-off in the global securities markets. Everyone is down. As I wrote over on Jared Bernstein's blog, I think the deal dashed all hopes for a recovery in the short term. Before, there was still some hope that matters might get better, and that at least the programs currently in place would stay in place. Now both of those are gone. I suppose one could view this as a correction. Perhaps the big investors have gone back to their models, factored in a lost decade, and are shifting their bets, going from stock to bonds. If this is so, I suppose this would become a trend, and some of the slack in interest rates would be taken up. I wonder if, ultimately, bond prices would rise.

(And, in fact, investors are buying up Treasuries like they are going out of style.)

On the other hand, it is interesting that the big fund managers are apparently now mostly Keynesians--otherwise we'd expect to see a jump in stocks, in the belief that deficit cutting would lead to growth. In another generation, this may penetrate the marble halls and marble heads of the world's capitals.


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