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More Perspective on the Crisis

Here are several interesting notes that came across my desk in the last 24 hours. (Sorry no links — the full notes aren’t available online.) They concern topic number one for investors these days: the economic crisis and governments’ response to it.

John Ryding and Conrad DeQuadros of RDQ Economics on the latest round of economic data:

We are tired of writing today that this is the weakest reading since sometime in the early 1980s, but this is broadly true of jobless claims, consumer sentiment, manufacturing activity, and home sales today. No doubt we will be writing this about the decline in GDP in the fourth quarter when the data are released in January.

The economics team at Deutsche Bank (DB) thinks worries about deflation are overblown, especially given the efforts of governments to flood the economy with cheap money and stimulus. However, they warn that the result of this aggressive government response could be higher levels of public debt and inflation in the future.

Societies are likely to be willing to take the risk of higher inflation in the longer-term if this reduces the risk of deflation and depression at present. Central banks will not be able to operate against such strong social preferences.

Central bankers might like to fight inflation after the crisis ends, but they’ll be limited by the huge levels of national debt the crisis created.

Brian Gardner of Keefe, Bruyette & Woods (KBW) assessed the impact of the latest announcements from the outgoing Bush administration:

Yesterday, President Bush signaled that more inventions could be on the way and Sec. Paulson reiterated that message this morning and we think that could help calm the markets for the rest of the transition period before the Obama administration takes office.

Ed Yardeni of Yardeni Research:

I no longer believe that Muddling Through is a viable economic scenario. It’s either going to be a very long and deep recession (a.k.a., a depression) or a V-shaped recovery. Washington’s policymakers have been behind the curve, as the saying goes. Now there is some reason to believe that they might get ahead of it.

Here is more on Washington’s latest efforts.

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