Returning to “Normal”

ile it is valuable to know how this challenging economic situation occurred, the gnawing question on everyone’s minds is “when will things turn around?”

Joel Naroff thinks that we are on our way but he does have some concerns for the future. In his own words, Naroff notes that “the pendulum has begun to swing.” Yet, it will likely take years to clean up the mess that was made while cleaning up the mess.

For the most part, he believes the government stimulus was the right solution.

His rationale is pretty straightforward.

For a country to exit a recession there needs to be a particular sector leading the way. We’d love it to b the business / housing sector. However, the business / housing sector assumed the turtle position. They went into a shell and reduced costs.

Our second choice would be the household sector but that sector is worried about having jobs and is hoarding cash, so this group won’t be our savior.

That leaves only one other segment to create growth – the government.

The reality is that there will be a lot of spending from the stimulus bill and it will start with construction.

And soon, 90% of those who have jobs will realize by the summer that they will make it and start to buy.

The jumpstart from the government will jumpstart the household sector which will jumpstart the private sector.

More good news…

The housing market is starting to bottom out. We know that this is happening because distressed assets (foreclosed homes) are starting to be purchased. If people are willing to make a deal, it means that they believe the price is close to its bottom.

Confidence is starting to rise.

And a lot of things have stabilized…even though we now need growth and not stabilization.

There are clouds though on the horizon.

The first concern rests on managing the potential for significant inflation. Naroff thiks that the Federal Reserve will have to increase the current low interest rates quickly – perhaps to 5 or 6% — and doing so will likely slow down growth.

Second, the latest budget projections has the federal deficit  approaching $2 trillion. And if interest rates go up, the debt service on this deficit will increase dramatically.

Banks will also move much more cautiously when lending money, in part because of their need to avoid the mistakes that were made so recently.

All of these factors will moderate growth.

Still – and this may actually be a good thing – we will need to learn to spend our income and not the appreciated financial or housing assets that so dramatically rose.

The bottom line for Mr. Naroff:.

Cleaning up the mess that cleaned up the mess will take 5 – 10 years. We have problems with interest rates, the deficit and the government being in the private sector.

We have not had real innovative growth for 20 years. We need to have technology innovation rather than financial innovation.  We have had recession then bubble then recession then bubble. Our growth has been driven by bubbles.

You can expect long periods of modest to moderate growth as growth conditions have changed dramatically

The Fed will raise the funds rates quickly because we will be worrying about inflation. Long term rates will likely rise by the Fall. He suggests that the Fed will be raising the funds rate from zero to 5- 6% in a year.

The ride will still be bumpy but it looks like, according to Joel Naroff, at least we are riding in the right direction.

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