Diary of a Hedgehog: Biggs' Final Words on the Markets

Fire and Ice

I have always loved Robert Frost’s succinct and sensitive poetry, and “Fire and Ice” captures the dilemma of both human and economic experience. I may be stretching the analogy here, but perhaps not. An economic policy of Austrian austerity and the ensuing “Creative Destruction” would burn off the debris quickly, in searing flames in a couple of years of deflation, breadlines, and massive capital destruction. A mix of reform and monetary and fiscal stimulus should result in a new ice age of stagnation and no growth. Pick your poison. Japan since 1990 is an example of the latter alternative. Anyway, it’s a wonderful poem, although not particularly cheery, and it rhymes in my soul.

October 11, 2010

Global equity markets, keying off the S&P 500, have climbed over the last six weeks, and another round of quantitative easing (QE) is expected shortly. It had better come or markets will feel betrayed. The high-frequency economic data from the U.S., Europe, and the developing countries indicate continuing slowing of the pace of the recovery but it has not been negative, and, to repeat, a fragile conviction is growing that the dread double dip is not developing. Meanwhile Treasury bond prices and fixed-income markets have gradually improved. However, with 10-year government yields less than 2.4%, bond buyers are implicitly forecasting further disinflation and even mild deflation. ...