2008-A year of pain. What about 2009?

The year 2008 has been disastrous for the global markets and for global economies as the deflation fears have established firmly in the minds of people. Economists and Policymakers are debating the methods of Keynes and the events of 1930s are helping to drive policy action.
Thanks to the "learnings" from that period current actions have been more comprehensive, co-ordinated across nations and are promising. However, as we have seen, each crisis has different ingredients and hence the solution must be different. It appears that policy makers are preparing for a situation where there arsenal is powerless, increasingly, and thus we now have a recession with a potential reversal not before calendar 2010.
In the new year the challenges that the world faces would come from emerging markets - in fact those challenges are already visible. Bric economies have begun to slide down and this unravelling has been a major learning from this crisis. In an inter-connected world crises travel across countries. Yet, given their high growth rates and an inherent desire of their populations to grow their Per Capita incomes, new hopes are rising that the emerging markets, especially the Bric economies could be the accelerators and help the developed world to climb up the hill. The trouble with this argument is the lack of sufficient domestic investment in emerging markets and their dependence on exports to the developed world. The world cheered as these economies became the new factories producing cheap goods for the developed world and helped control inflation but the world is now surprised that those economies cannot become the providers of demand or help take up the slack that arose from the slowdown in advanced economies. Hopefully, coordinated action that we are seeing from the emerging economies will help to slowly bring about a quiet recovery. If they fail this recession will be much harder on the developed economies.
We can now also see why a prediction for the dollar has become difficult - if the US is to come out of the mess it needs to export some stuff to other countries (who in turn would have to generate demand). Its currency yields next to nothing. Such conditions ideally bring about a reversal to recessions. A fear of deflation seems to be now haunting everyone which along with the unwillingness of lenders to give money to anyone is hitting credit markets. The other developed economies (with the exclusion of Europe where a major slowdown is some months away) results in the danger of all of them being put into one basket. So, on the twin scales of returns and growth, it would appear that the US should suffer in short-term and show promise in the longer term. However, the fall in long term yields (nominal and inflation-adjusted) promise no long term growth prospect!. So, as you can see the equations do not match up. And hence the state of markets. Hoefully, the new year will throw up some leads and help markets to decide which way to go.

PS: Apologies!I could not update the blog last week. The breakdown/slowdown of the net was one reason while my laziness was the other reason.