FedEx Blog

FedEx Blog

It’s About Time for Confidence to Come Back

December 4, 2008

At this juncture in time, the economy faces two “systemic” near-term problems. First, the financial side the economy is very close to a “liquidity trap” – a situation in which conventional monetary policy loses all traction. Second, the real side the economy is in what Keynes called a “paradox of thrift” – when the entire private sector (businesses and households) tries to save more at the same time, it creates a downward spiral in business activities.

Neither one of the problems has a simple solution, yet both of them have something to do with a need for credit or liquidity creation. In the U.S., here are some ideas that economists proposed recently:

  1. A massive fiscal stimulus package.
  2. More monetary easing by pre-committing to keep the federal funds rate low for an indefinite period.
  3. More direct interventions by the Fed and/or Treasury, including purchases of credit instruments and agency backed MBS to bring down private-sector borrowing costs.
  4. Congress provision of authority to the Fed and/or Treasury to buy a broader range of risky assets as an extension of TARP.
  5. Arrangement of guaranteed restructuring in Big-3 (or at least GM) in exchange for bridge fund.

Globally, monetary authorities are coordinating policy actions with four major pillars: liquidity creation, direct capital injection, purchase of troubled assets, and provision of guarantees.

Given time, some or all of the above measurements will work. At some point, collective expectation in the marketplace will recognize the facts that asset prices have been severely dislodged across all classes from their fundamental values and energy prices have now turned supportive to growth. It is also helpful to see some initial confidence given to the new administration and its economics team. It may be about the time for sentiment to find and form a bottom.

I think a constructive perspective should be valued and warranted. Here is why: Sentiment has been embarking a self-fulfilled downgrading process in recent months that may soon prove overdone. More importantly, liquidity is probably more a state of mind than substance in the current financial system as the derivatives portion is larger than traditional money supply. Yet valuation of derivatives is significantly influenced by confidence. Once confidence comes back, liquidity will come back as well, to an extent that it may even bring some upside surprises to what’s been factored in the current market consensus.

The U.S. economy is the most resilient in the world due to a mechanism of market oriented incentives and risk-taking nature of its participants. This has not changed. Despite 50 percent decline in stock market valuation over the past 12 months, homes are still the same homes; lands are still the same lands; companies are still the same companies; technologies are in fact improving, and most importantly, people are still the same people. This fact itself should instill some optimism.


    Jason says:

    That was a lot of big words and I didn’t understand half of it. But I think the gist of what you are saying is that given enough time confidence will come back to the market and we will be better off than before. I agree, but I think that would happen on it’s own because of our free market system. Government interference almost guarantees that the recovery will be slower and more costly than if they kept out of it.

    So I think given time we will recover IN SPITE of the above measures, not BECAUSE of them.

    Michelle says:

    I’m buying a new couch, but I am not yet confident enough to buy a new car!

    Marlin says:

    Nicely put Doctor.

    Parker J Arendell says:

    “Sentiment has been embarking a self-fulfilled downgrading process in recent months that may soon prove overdone. More importantly, liquidity is probably more a state of mind than substance in the current financial system as the derivatives portion is larger than traditional money supply.”
    You mention ‘sentiment’ and ‘state of mind’ like the economic problems facing the world are a state-of-mind situation? I think things are a lot more serious than that. While I congratulate you on the fact that you seem to be looking for a silver lining to these dark clouds (economic troubles), I sadly have to inform you that all you are doing is getting wet in the storm. My 401k is now a 201k, on the way to a 101k. Things are going to get worse (lots) before they get better. IMHO. Thanks for your time.

    Parker J Arendell says:

    I totally disagree. Things will not get better until they are forced to confront the underlying issues, which include:
    1) No transparency in accounting balance sheets
    2) Too Big To Fail companies that privatize gains and socialize losses
    3) Greed
    Thank you for your time.

    dave says:

    From our chief economist.. He’s been very accurate..


    Richard says:

    Excellent post. I follow your blog and it’s nice to hear someone who know’s about this subject speak objectively about what is really going on. I think that alot of the problem is too much information to such an extent that it’s keeping the econony from moving forward and correcting. All bad news all of the time. But that’s what sells papers. It took the government a long time to officially declare a recession and the fact that it’s already a year old should be good news because hopefully we are getting close(er) to the end of it. I know that there is bad news to come as this ripple effect will take time to work itself out, but we’ve been in this for a year and we are still going. I agree with you that it’s about time the confidence comes back but I hope there is a lesson learned for everyone. We cannot ever forget the down times, including their causes and effects.

    Guest Sharron W Rose says:


    I respectfully submit that the average citizen will not have confidence restored until:

    1. Creditors are limited by usary laws again.

    2. Universal credit laws are overhauled.

    3. The FBI brings to task the people who took
    advantage of the borrowing public.

    Then perhaps you will see the average consumer
    part with some of his cash.

    Judith C. Abadie says:

    We need more logical articles like this inlieu of
    the constant negative reporting of all forms of

    John Suzanne, DSA says:

    It would be helpful to non-economist readers to spell out acronyms prior to first use i.e. MBS – Mortgage Backed Security, TARP – Troubled Assets Relief Program, US Treasury

    Roberto Lozano says:

    A lingering issue that could create additional problems for the US economy in 2009 is the huge projected budget deficit which will surpass a trillion dollars. To finance the budget deficit, the Treasury will be forced to finance it by issuing treasury bonds. Yet, there is a high level of uncertainty in the capital markets right now, about the future willingness of potential bond buyers to purchase such a large amount at the projected interest rates. If these foreigner buyers (mainly China and Saudi Arabia) refuse to buy at existing rates, the Treasury will have to increase the yield rates significantly to make the bonds attractive. Such a move would in turn affect the entire interest yield curve and thus aggravate the debt burden in the future.

    Greg Pittaway says:

    Gene thank you for the interesting article on the U.S economy.there were several points noted.You had made mention that “Given Time” monetary policies that were put in place should take effect.

    depending on who you ask.The normal recession is approximately 16 months.Some have stated that we are looking at alot longer than that time frame.If so, how long and what major factors aside from the housing market will bring us out of this.|

    Thank you again for your time……Greg Pittaway

    Frankie Ng says:

    Thx, Gene. A nice analysis.

    From my perspective, confidence will finally come back, probably at the end of 2009:
    1) when unemployment rate in major industrial nations could be stabilized
    2) when Obama Administration run for a year and know the rules of games in such dynamic and complex global environment
    3) people have higher purchasing power to spend after 16 months of saving
    4) productivity has been further improved via resource allocation
    5) when mild inflation comes to the market again due to increasing demand
    6) China, a developing economy, can be on the upward spiral of economy growth after a merely 8% growth in 2009

    Again, thanks for your sharing.

    Carl Hardeman says:

    Are we headed for another huge crash when some large percentage of people have little or no credit card credit left?

    That would stop a lot of consumer spending.

    Would another bailout be required?

    Carl Hardeman says:

    What would be the impact if, as suggested on talk radio, the government agreed to buy 1.5 million autos from the Big Three, and then sold them to the public at a discount?

    Brian Burdette says:

    Dr. Huang,

    Given what we are facing during this time of economic turmoil, what timeframe do you anticipate seeing before the economy begins coming back? Some have forecasted one year, two years, sixteen months, etc.

    Do you have a ‘guess’ as to how long this downturn will last?

    Thank you!

    michael says:

    The rapid increase in energy prices acted as a significant catalyst to drive down individual demand. With the decrease in disposable income, families began to have less to spend in our consumer driven economy. We have now seen a dramatic decrease in energy prices, but the confidence on a macroeconomic level is yet to return.
    We tried the stimulus check, but these have not worked in the past, and didn’t work in 2008, because they are not indicative of permanent increases in wealth. If I was expecting $600 once, my spending or saving decisions would not change; if I was to expect a consistent tax decrease which would give me an additional $200 a month, my habits/confidence would be positively affected.
    A key ingredient, although not the entire recipe, is an income tax reduction on individuals and businesses if we are to see a quicker return to normalcy.

    (financial responsibility and energy independence would help to prevent future occurrences)

    Very nice articles thank you…

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