Risk Rap

Rapping About a World at Risk

Three Legged Stool

During our last recession back in 2002, I attended a prime brokerage conference at Credit Suisse First Boston (CSFB). A senior economist for the firm gave a presentation on the economic outlook for the coming year. The economist explained that the US economy is like a three legged stool. In his analogy, each leg of the stool representing different demand drivers for the economy.

The first leg represented government spending. The economist suggested that due to the balanced budget amendment and a federal commitment to tax cuts government spending would be curtailed so we cannot expect this segment to lead the recovery.

The second leg of the stool was corporate spending and since earnings growth had dramatically slowed CSFB indicated that we cannot count on corporate spending to lead us out of the recession.

The last leg of the stool was consumer spending. The economist indicated that the American consumer was still a vibrant demand driver due to the rise in the value of their real estate holdings and the potential to unlock the equity within their homes. Consumer spending played an important role in leading the US economy out of the last recession. But the depletion of home equity has exhausted the resource of consumer spending as a leading driver of demand and we cannot expect a consumer led recovery to get us out of the current recession.

Evidence of the slowing consumer spending is reflected in stagnant growth of retail sales as reported by Haver Analytics in its report for March. So it is with great trepidation that we greet Goldman Sachs’ announcement that corporate earnings will be “awful” .

During the last recession the CSFB economist did not foresee an accommodationist Fed policy that unleashed a Tsunami of cheap credit and a mammoth off balance sheet spending spree to fund the war in Iraq.

So the question of what will drive economic growth to lead us out of the current recession? Cheap credit is creating global inflation pressures and stoking friction between the worlds central bankers and is a contributing factor in the Rice Crisis.

What role will government spending play in leading us out of the current recession?

Will we witness further off balance sheet expenditures to fund a retooling of our depleted military and some much needed investment in our corroding national infrastructure?

Risk: Inflation, Credit, Market, Military Spending, Social, Corporate Earnings, Recession

You Tube Video: Guffman Stool

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April 17, 2008 - Posted by | credit crisis, economics, infrastructure | , ,

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