What Keeps Me Awake at Night?

Besides the usual daily happenings of life, what else keeps me awake at night?

Well, it is the thought of the fine line which the Federal Reserve and Treasury and their counterparts elsewhere in the world are doing. It was only a few weeks ago, that the UK added $75 billion (or was it pounds) added to the money supply. And more recently, the US added $1 trillion. I get shivers up my spine thinking about the inflationary pressure that this would create. At the slightest signal that the economy is picking up, Fed would have to step in and begin raising interest rate. That is not as complex as it sounds, except for the fact that the US economy may not be as strong at that moment.

With consumer spending expected to remain anemic and continued job losses, what would be the signal that the economy is picking up? One indicator may be a slight uptick in manufacturing (except that the US does not make much of anything). This uptick would imply that inventories are running low. That somehow seems to be a distant future. Hence, Mr. Bernanke's assertion that recovery will begin in 2010.

But, yes there is always a but. And that is what will derail this recovery? First and foremost, is the unwillingness of banks to attempt to better identify the extent of toxicity in their balance-sheets combined with the hesitation on the part of the Administration to move quickly identify and isolate toxic assets and as I have said earlier move them into an entity akin to Resolution Trust Corporation v. 2.0. I know...I know that the CDOs made it very difficult to identify individual assets. But there is something in the computer world called "reverse-engineering". Because the longer we take to fix this problem, the greater the chance of entering an era of prolonged stagflation when the increased money supply begins to chase too few goods. And also the longer it takes to isolate the toxicity, that much longer the credit markets will remain locked up, and that much longer the job losses will continue to mount leading to more foreclosures and more misery.

And this may yet become America's Lost Decade (similar to what 90s was to Japan). I would almost venture to say that under the current circumstances, speed is more important than accuracy.

And so that's what keeps me awake at night.