Investment Management Blog - Montague Capital

Recession or not? This is our view on the US economy…………..

Will it be enough to satisfy the markets and, better still, do something to revitalise the US economy?  As had been expected of it, the Fed duly obliged last week and lavished another 0.5% prime rate cut, bringing the total monetary stimulus to 2.25% over the last four months, very nearly halving the benchmark rate of interest.  Economic statistics have deteriorated conclusively over that period, making some form of monetary easing almost obligatory. 

What about inflation?

The US inflation situation has not made that a comfortable decision.  Unless the recession into which US Inc. is now headed (or, as some believe, has already arrived) has the desired theoretical effect on prices, as soon as the economy does recover the monetary brakes will have to be re-applied in earnest.  Otherwise we’ll be right back to where we started but with the threat of stagflation thrown in too just for fun. This will be particularly relevant if the rest of the global economy does not slow down in sympathy but continues to hoover up raw material inputs to sustain its own growth.

Other factors………..

For our better future economic and monetary health it is also high time that big demands were made of (and conceded by) the banks.  When they emerge from rehabilitation (which won’t be a quick result) we don’t want to see a return to the “bootstraps lending” that has been a primary cause of the present disaster. The far more challenging philosophical proposition is that the US economy is a gas guzzler whose excessive demand for monetary “petrol” is now having a seriously adverse impact on the global monetary climate.  The assertion that it “needs” to grow at 3-4% has not been justified by productivity improvements or technological advance in recent years and has only been achieved by a dangerously “creative” approach to financial innovation. 

Finally our thoughts on the UK?

A sense of reality is urgently needed.  While we will no doubt experience occasional periods of discomfort, the UK can consider itself fortunate that Mervyn King has been reappointed for five more years as Governor of the Bank of England rather than being replaced by a political puppet.