The period of credit expansion from about 2001 is over. Large amount of capital is destructed; deflation rampant, a half year or a whole year of recession awaits us. Why this deflationary cycle was so severe? In my opinion, it was caused by spike in commodities prices, especially oil. Because of commodity price inflation the Fed and ECB was reluctant to lower rates and we got severely short on liquidity. The main reason was the housing correction of course.
Now, with commodities prices quickly deflating, and Fed rate at 1.5% and soon to be lowered to 1.25% and then to 1.00%, the central banks are no longer worried about inflation and are intended to flood the market with liquidity. Now, we need to convince the banks to give out the loans and the world economy is ready to start a new expansion cycle.
What will be the next bubble? I am thinking on and, as usual, my guess is no better than a random guess. I will watch and see. Meanwhile I am off the market, just playing here and there with small stakes.
