(Ed Note: This analysis courtesy of Victor Adair who notes that its been translated from Dutch so some of the syntax and grammar may not be familiar)
Great uncertainty regarding growth expectations
The bursting of the asset price and credit bubbles brought an end to the old growth model for Western consumption growth, based on credit growth with rising asset prices as collateral. Setting up a new growth model is complicated, however, and will be accompanied by painful measures. The way of less resistance for the authorities is therefore a return to the old growth model. This way is not without pitfalls, however.
There is a continual threat of a deflationary spiral as long as overcapacity remains great, consumers want to save more and repay debts and asset prices continue falling. To prevent this, the authorities have to stimulate the economy and financial markets sufficiently. It’s easy to make a mistake, however. If the economy is overstimulated, then the risk of higher inflation and long-term interest rates quickly increases. With too little stimulation, the economy can slide back into a deflationary spiral. Both ‘errors’ then have to be corrected by stimulating or tightening twice as hard. On balance, this generates a picture of volatile, but low growth for the coming years.
….read the whole document HERE.