Ian Shepherdson, of High Frequency Economics, says that deleveraging the US economy will be rather onerous and take quite some time to accomplish. Bad assets on personal and institutional balance sheets are like a ball and chain on the economy's ankles. The Fed is not likely to touch interest rates until 2011, he estimates, writes New York Times columnist, Gretchen Morgensen.
The fallout from deleveraging has put small businesses in jeopardy. This is a revealing look at what continues to be a largely untold story, because Wall Street tends to focus on large companies. In the shadows of the economy, small businesses, important engines of growth, are suffering from the chokehold on bank credit which places them "squarely on the brink."
The message amid this gloom, he says, is that the Fed isnāt likely to raise interest rates anytime soon. In fact, he doesnāt anticipate an increase in rates until the spring of 2011.
āI WOULD be astonished if they raised rates in the heart of the credit contraction storm,ā Mr. Shepherdson says. āThe credit contraction will last for a couple of years and if the Fed is interested in offsetting it, they will have to buy assets through next year.ā
Deflating an asset bubble is never fun, and this particular specimen is one for the record books. The binge may have been a blast, but the purge, alas, sure is painful.
This is without doubt a deflationary outlook for the economy, from Shepherdson, an economist whose forecasts have been right more than wrong. He calls for 2% GDP growth through next year, roughly half of the market's expectation of 4-5%.
Get Ready for Half a Recovery, New York Times, November 28, 2009.
