The forecast is for this to last for about a year. However, there are good reasons to be skeptical to this. Debt is not normally paid back very quickly, and the appetite for debt tends to be muted for a while after a debt binge. Having accumulated debt for ten years in a row, there's an awful lot of debt to be paid back.
My guess is that consumption is going to decline even more, and for much longer than a year. There will be layoffs and cutbacks in investments. This will stress the consumer even more. Consumption will be rolled back even further.
The credit expansion that led to expanding consumption is about to be replaced by shrinking credit, resulting in less consumption. Uncertainty about the future will force people to pay down debt as fast as possible. Those not in debt will put money aside as savings.
Companies will have to cut back even more. This will continue until a new equilibrium is reached, with much less debt and much less consumption.
None of this is good for the Status Quo. Central banks will do everything in their power to get the consumer back into buying stuff. Interest rates will be set near zero. However, none of this can fix the fact that the principle owed by consumers is already too much to bear. There is no room for more debt.
Wall Street, on the other hand, is likely to respond positively to lower interest rates. Stock prices may very well continue up while the real economy tanks. But this cannot last for very long. Wall Street cannot ignore the fact that companies are becoming less profitable. Not even negative interest rates will be able to save a stock market full of loss making companies. After a short lived spike in stock prices, reality will overwhelm the markets, forcing prices to more accurately reflect the profitability of companies.
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| Sunset in Matosinhos |
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