Our problem today in analysing the economy and markets is that we have just experienced a 10 year avalanche of excessive money supply growth. If you have any doubt about this, take a look at the chart in Market Notes 63, titled 'Who's the Patsy'? The idea that we or even the central banks have any clear idea of where we currently stand given the magnitudes is simply unrealistic. For now central banks have finally started an attempt to reduce liquidity by gradually raising interest rates. But quite how far they will have to go to offset the previous credit binge is really anyone's guess. If anything it now looks as though they are being far too cautious, interest rates are still very low in Japan and Europe. Even in the US, interest rates still look like they are below the nominal growth rate in the economy, which may still not be sufficiently restrictive. So far around the world, growth still seems very strong and liquidity abundant.
Until the indicators clearly weaken, or policy becomes far more aggressive, it may be wise to assume that current strength in worldwide growth may still have some time. Current trends may, therefore, continue for much longer than many expect and interest rates may need to continue to rise.
Longer term we still have to be somewhat careful. With such a high proportion of the growth being artificially stimulated and debt levels being so high. The slowdown, when it does arrive, could be quite sudden and severe. A good money management system may well be the key to not just profiting from the current benign environment but also to hanging on to those profits, when the turn eventually comes.
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