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More Risk, Less Return

Following four decades of excessive credit expansion, the U.S. experienced a bursting credit bubble in mid-2008. In the aftermath, North American stock markets declined almost 50% by early 2009. Fast forward to the summer of 2012 and North American stock markets, exhibiting strong resilience, have now recovered to their pre-bubble highs.

Over the past four years it is mainly perceptions, rather than actual economic fundamentals, that have changed. There is little doubt that the global economy has stabilized as a result of the actions of many of the world’s central bankers, however, much of the fallout from the excessive credit expansion remains. Central bankers have set interest rates at artificially low levels to save overindebted consumers and governments – at the expense of pension funds and individual savers. The consequences of these actions are unknown as central banks have never operated in this manner before. At a minimum, the developed world will confront a very lengthy period of deleveraging.

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