The only thing cyclical turns have in common is that they turn. Other than that, the way of their turning can be pretty unique.

Consumer confidence has proven itself a leading indicator at most turning points of the business cycle, leading by up to three quarters at the upper turning point, and with much less of a lead at lower turning points.

But each cyclical turning remains pretty unique, and today’s turning is probably no exception.

With the economy having completed two quarterly GDP declines (4Q2008 and 1Q2009), with the current quarter (2Q2009) also shaping as a decline, and with the next quarter (3Q2009) probably being touch-and-go, we are still in recession and some way from exiting, probably only from the 4Q2009.

Yet the FNB/BER consumer confidence index allegedly signaled the coming cyclical upturn BEFORE the economy was even close to entering actual recession.

Some of this may be optical illusion, to be blamed on Eskom, OPEC and SARB (fun partners indeed). Their doings early last year were shocking enough to trigger a near record decline in the FNB/BER consumer confidence index to -6 in 2Q2008.

That marked a cyclical low, if still in pretty much neutral territory, especially considering previous cyclical lows these past three decades.

In contrast, full-blooded consumer recessions in the past have shown confidence readings of closer to -30 (1985) or even -20 (1993). The 1998/99 cyclical low point (supposedly no recession) was much less intimidating. The even lower 2001 low point probably mainly reflected anxiety about events (shocking Rand decline and its possible implication for interest rates, on past experience) rather than the reality of recession.

If the 2Q2008 rate of descent had been just a tad less shocking and the consumer more gradual in her loss of confidence, 4Q2008 may have been the cyclical low at -4.

That would already have been more believable as a turning point signal, coinciding with the worst part of the global hit to our industrial output and mining exports, and the start of the SARB interest rate cutting cycle.

So perhaps write off a 2Q2008 turning point in consumer confidence to coincidence and exceptional shock value of preceding events which ultimately had little bearing on the recession of 2009 (triggered as this ultimately was by the late 2008 global events, really).

Even so, we have to use the data we have. What makes 1H2008 so extremely unique is that the entire descent in confidence was achieved in two quarters of uninterrupted rapid decline (something widely remarked upon at the time, everything happening so shockingly fast), with less than a year distance from the peak exuberance.

The last time South Africa experienced catastrophic decline in consumer confidence was in 1984/85, but it took at least four quarters to fully reveal itself and the low point was at least five years removed from its 1980 peak.

The 1993 collapse also took four quarters, and again five years removed from its 1988 peak.

The 2001 low (two years past the growth recession of 1998/99 and six years after its earlier peak), is even more of a bizarre slow coach.

So the bad news of the past year has to be the abrupt nature of exuberance loss in early 2008, but thereafter the recession was very focused (in industrial export activity and interest rate sensitive sectors). Over the subsequent twelve months consumers started to signal better times ahead even if the economy was still in the full grip of a globally induced recession.

Even though a growing majority of consumers continue to indicate the present is not a good time to buy durable goods, they did so unfailingly as well in previous cyclical downturns and continued to do so long after their forward-looking views about the economy and their own finances had started to improve.

On this score, therefore, we should not read too much in the very depressed confidence readings about buying durables today. Such sentiment seems to lag as caution lingers. Meanwhile, actual cyclical recovery starts elsewhere in the economy (inventory destocking slows, ends and eventually reverses thereby boosting output).

Indeed, such sentiment seems to generally lag as well the early birds which start the consumer revival in durable consumer buying. Apparently, the majority of consumers seem to take their time being converted to more positive readings about the present being a good time to buy durable goods.       

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

With the recession biting deep, some 200 000 to 300 000 formal jobs being lost rather than being created this year, informal work opportunities being lost as money is tight and public service delivery in many areas struggling to bring its side, Mr Zuma provided us with his vision as to how these things will be addressed.

The President crafted his speech around two distinct topics, namely addressing the immediate consequences of the recession, and in a broader context offering a Medium-Term Strategic Framework through 2014 for addressing public sector shortcomings.

Unsaid was the expectation that government spending will continue to increase in real terms, that growing tax revenue shortfalls will be funded through increased borrowing and that as a consequence the national debt will be allowed to cyclically rise before subduing it once again in later years once growth revives.

Besides such direct state support for the economy, the SARB has lowered interest rates, with probably more cuts still to come, thereby also providing crucial support for the economy.

In the final instance, South Africans will be dependent on the rest of the world to similarly take corrective action everywhere, ultimately collectively pulling us out of this deep morass globally.  

This reality makes the public sector and the construction sector (between them one-sixth of GDP) probably the only areas in the economy where there will still be vigorous employment gains this year.

With this as background, Mr Zuma favours minimizing the impact of the downturn on the most vulnerable, whether in formal employment (likely to be retrenched) or out of it.

Besides many of the most vulnerable enjoying access to social grants, with 13.5 million recipients so far but with this tally likely to rise further, Mr Zuma envisions a much expanded Public Works Programme, putting money in the hands of those with minimal safety nets.

In contrast, formal sector job losses will be addressed through various mechanisms, about which few specifics or quantification was forthcoming.

There was mention of encouraging ‘training layoff’, with retrenched workers kept in employment for a period while being re-skilled.

Hope was expressed that the Commission for Conciliation, Mediation and Arbitration could find legal alternatives to retrenchment with the various role players involved.

There is the intention of government buying more goods and services locally (reminding of Obama’s Buy American).

Pride of place was given to the IDC funding companies in distress, apparently meaning otherwise viable companies brought fatally low by recession, but not blanket sector-wide support or support for businesses beyond saving.

There was furthermore mention of a Scaled Up Industrial Policy Action Plan, involving mainly manufacturing (specifically motor industry, chemicals, metal fabrication, clothing and textiles, light manufacturing), but also forestry, services (tourism and other) and construction.

It is not clear how these various action plans will prevent job losses or create new work opportunities. By the time these actions are taken, the economy may well be past its recessionary low point, with labour layoffs mostly completed.

Still, some job losses may be prevented and new jobs created in time.

Much bigger ambitions seem focused on the expanded Public Works Programme, where it is hoped to help half a million people during 2H2009 and up to 4 million people through 2014. This presumably will benefit especially the lesser skilled person with few chances of finding deployment in the formal sector.

Though some of these initiatives are new or may appear ambitious, Mr Zuma was careful to stress these actions will be undertaken within currently constrained budget realities, given the global crisis backdrop and the recession. Still, with government expenditure set to keep growing smartly in real terms, there is obvious scope to do at least something, if only to do existing things more efficiently as every Rand counts, something that was also very carefully stressed.

Whether that means less ‘bezzle’ (an old Galbraith concept meaning a lack of organizational discipline and easy largesse in good times expanding costs unnecessarily) remains to be seen.

Beyond the short term, the Zuma ambition is one of improving public service delivery, both as a service to the people but also in support of growth, in this respect continuing the Mandela and Mbeki agendas.

It is an intimidating list:

• Undertake comprehensive rural development linked to land reform, agricultural reform and food security.

• Improve education

• Improve public health care

• Fight crime and corruption while strengthening the judiciary

• Pursue African advancement

• Ensure sustainable resource management

• Utilise state levers to achieve many things through procurement, licensing, financial support to assist small/medium enterprises, broad-based BEE and affirmative action (its implementation recognizing the need to correct past imbalances)

• Reduce regulatory burdens on small businesses

• Promote National Symbols (sport, names, anthem)

 There can be little doubt that these visions will be guiding the country in coming years, even if our future is primarily shaped by global forces.

It remained unstated, but the recession will eventually end and the country will embark on a new economic expansion in which the national income will again rise substantially, employment will expand anew and the resources will be found for yet more public services.

As such Mr Zuma is catching the cyclical wave at its very lowest point. With him we can look with confidence to the years ahead in which much should be achievable, if not always without a squabble or two.      

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

How to save the world?

It is a fundamental question. But instead of growing convergence in thinking and policy prescriptions around the world, there appear crucial dimensions in which there is growing disagreement about what to do next.

If such disagreement were to go too far, it could have fatal consequences.

We note disagreements between central banks (serious), between governments (very serious), between academics (serious for future historians), between forecasters (serious for current reputations) and probably between husbands and wives (watching too much or too little telly, depending).

Central banks seem to have started to criticize each other. There isn’t any blatant name-calling going on, but there seems to be this high-road low-road business, one party claiming we-will-do-this, with another saying quite succinctly we-will-never-do-that.

Does it matter? It could.

Anglo-Saxons, along with the Swiss (and Swedes), seem joined at the hip about taking interest rates down to near zero, and to move next to quantitative easing, described by some as basically credit easing.

The aim is to get lending going again. In the case of the Swiss (and the Swedes), there is the additional aim of getting a strong home currency to weaken, protecting the home economy under increasingly dire circumstances.

These central banks have lowered interest rates to near zero in the hope of pulling effective interest rates in the economy to low levels despite very wide spreads.

It also has induced certain central banks to start making credit markets of their own (for commercial paper, auto loans, credit cards, student loans) where such markets have ceased to exist.

As to quantitative easing, large quantities of fixed income bonds (publicly and corporate issued) are held in private institutional hands. By buying such bonds on a large scale, Anglo-Saxon central banks could be doing various things.

They will drive up the price of such bonds, lowering their yields. And they will inject a lot of cash into the financial markets, increasing the cash holdings on banks balance sheets.

With banks still very distrustful and not really wanting to lend out money to risky customers, but with bond yields still attractively high, any increase in their cash holdings would induce banks to buy more bonds.

By reducing bond attractiveness (falling yields), while loading the banking system with cash (the Bank of England for instance wanting to expand the British monetary base very quickly by 80%), with no low-risk reasonable return investment alternatives available to them, the idea is to prompt banks to start lending again to more risky but also higher return borrowers.

Initially, this won’t quite work as banks will prefer to safely hoard cash/liquidity rather than start lending. But as the cash mountain grows and grows (a rising tide), watch out for a gradual breakdown in hoarding as banks get pushed to do something with what is ultimately still relatively expensive cash.

And so the Fed and BOE are starting to buy bonds, although there could be leakage.

Many bonds are held by foreigners, and buying from them could inflate the cash deposits of their home banks, while putting downward pressure on one’s own home currency (Sterling, Dollar, Swiss Franc, Swedish Krona).

Ideally, all major central banks would undertake such actions at the same time, neutralizing such leakage effects on each other, while collectively pumping up the global financial system.

But the ECB specifically doesn’t want to go there, or so it is still saying today. Some of its leading elements see it more like an invitation of blowing up the world. Not for them, it seems.

The Anglo-Saxons see the danger of Europe not repairing its credit-lending processes fast enough, becoming an ever greater drag on the world economy.

The Europeans seem to fear too much money creation and new types of financial instability.

This doesn’t seem to face the Anglo-Saxons. Credit has to start flowing again, and any involuntary unwillingness among private banks needs to be forcefully addressed.

This is aside of bank capital adequacy needing to be improved and impaired (toxic, reduced-value) assets needing to be written down. This is being addressed separately through bank nationalizations (partial and otherwise) and public capital injections (which are issues for national treasuries and their governments to address, mobilizing their tax bases).

In the short term, even more serious is the apparent difference between governments concerning their roles and what they need to do most urgently.

Some (especially Europeans with some emerging markets in tow) want to focus on getting financial market regulations tightened as soon as possible (along with governance changes to international lending agencies).

Others, especially Americans, seem to think this very important but not an immediate urgency (Heaven Can Wait).

The immediate priority for the latter is to keep effective demand in the world economy sufficiently high even as households deleverage (cut spending in favour of saving) and many corporates defensively cut inventories, fixed investment and labour forces.

Thus, the US government wants fiscal emergency packages everywhere to maintain global spending, consumption as much as investment, imports as much as exports.

Others, with histories of painfully restoring their national finances to health after wide irresponsible detours, often ideologically induced, aren’t so keen. One example is Germany, but many smaller countries hold similar views.

This is in part a free rider problem, with little and not so little guys wanting to do as little as possible, hoping to keep their finances healthy and limiting future burdens while the big guy does the heavy lifting and pays the potential long term price of impaired finances and competitiveness.

There is a touch of righteousness here (the Americans created this problem, let them catch the falling knife), but it is more than this.

For some it is ideological, not wanting to sacrifice one’s long term financial health for uncertain short-term gains. Yet it is precisely the Keynesian insight about all being dead in the long term that prescribes focusing on the short term if one wants to prevent enormous economic pain from being incurred for a very long time due to inadequate demand settling in and not easily being budged.

These tiffs extend into academia but also along the political spectrum.

In the US, the Republicans are the righteous defenders of the neo-classical faith, whose mantra is a simple one – stability is the central assumption, and any investment mistakes should be allowed to be washed out, so that the system can rise off its own bat, purged, lean and mean and roaring to go.

But as Larry Summers puts it, “this notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times ……… there is a need for extraordinary public action at those times”.

The philosophical divide extends deeply into academia.

Both neo-classical and New Keynesian macroeconomic frameworks depend on rational expectations, fed by the Great Moderation of post-WW2 decades in which there ultimately no longer proved to be space for uncertainty.

Philosophically, information is freely fed into these models from the outside. In the neo-classical case it is the Walrasian Auctioneer and for New Keynesians it is the information generated by the model.

Effectively this is the same thing, if subtly different.

The bottom line in both approaches is that uncertainty cannot exist. It isn’t possible to encounter something as is currently entertaining the world daily.

Both approaches advise that the financial and economic system will recover by itself under all circumstances.

In contrast, government intervention is seen as always fatal, being castigated as a source of instability.

Yet sometimes enormous shocks can develop, coming from the outside, so big that uncertainty becomes an overwhelming reality from which it is difficult recovering, as Summers put it so succinctly.

It is at such moments that the only party not usually subject to uncertainty and its paralyzing fears is the state, it not being guided by commercial considerations. At which point the state can play saviour if it understands the situation and the contribution only it can offer when all have withdrawn to the sidelines, refusing to dance.

Thus, the contrary view to both neo-classical and New Keynesian offerings is that reality isn’t mostly stable. The opposite is true. Real life per definition is unstable. If events reduce risk-taking and effective demand, these reactions may ultimately prove large enough such as to induce paralysis, both taking very long coming back under their own steam.

A global majority today favours being proactive and supportive rather than standing back. Still, it is an important divide, and may prevent as much of a global effort, and soon enough, that would limit the transition cost of getting fully back on stream.

This feeds reputation risk for legions of forecasters reading the tealeaves and advising their clients.

Will the world descent into depression and deflationary feedback loops as all fall down and little can be done to prevent it happening, taking years if not decades to fully come back from such disaster?

Then there are those who are simply skeptical about financial repair efforts (it takes oodles of time sorting out banks), about government actions (getting fiscal stimulus agreed and enacted), about what Anglo-Saxon central banks think they are doing (inflating their balance sheets and potentially laying the foundation for the next great financial disruption via currencies and inflation), and what the huge government debt enlargement will do to private capital markets.

All of this takes time, a lot is experimental, some of it won’t work, and confidence will take time to be restored.

Ergo, don’t hold your breath, as this will take more than a few quarters to get right (more likely years, if not decades).

Finally, there is the simple quarterly forecast modeling inventory drawdowns (always coming to an end), fiscal injections (always showing up, however weak), credit system repair and resumption of bank lending. And, most crucially, the gradual return of confidence (or rather the slow subsidence of fear).

After maximum car replacement delay, big fixed investment cuts, inventory drawdowns and labour force shedding, the economy stabilizes and then starts to respond favourably to lower energy prices, slashed interest rates, huge fiscal injections and major currency changes. And critically there can be observed a change in sentiment as bank repair at some point is seen to be working, led joyfully by equity markets rising. Fear (paralysis) starts to subside.

After writing off a few quarters, admittedly more of them and much deeper than usual, it is time to get back on track. In this fashion, the US entered recession in late 2007, fell of a cliff in 4Q2008, will explore even lower levels of deprivation in 1H2009, and should be coming up for air in 2H2009, positive growth resuming in 2010.

This is of course a rolling forecast, with every passing month, and quarter, creating new opportunity to extend the forecast yet more as reality is turning out to be a good deal more horrendous than ever imagined.

But then what did you expect?

“They” blew up the world, meaning the banking system and with it a few other things, such as housing, insurance, equity markets, a few pension plans and companies, and much more besides.

It takes time, effort, ingenuity and political will to come back from that. And the world is doing so, though not quite unified about how to do so in the fastest possible time with the least sacrifice.

And so we are still exploring the full extent of this shock and the loss it will impose on us before normality is restored and life can resume its reach for the stars.

As to any cyclical upturn commencing, it could still be before this Christmas, with President Obama having something real to promise this coming Thanksgiving, besides traditionally reprieving one lucky token turkey.

And so we watch Bernanke, King and Trichet with morbid fascination, and with deep skepticism follow Geithner, Darling and a few others, with the orchestra of politicians (Obama, Merkel, Brown, Sarky and a supporting G20 cast of thousands) doing the directing.

Would it have been different under Hillary? No.

McCain? Definitely.

Count your blessings, this coming X-mas. Only 275 more sleepies to go.      

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

Charlie Bean, Deputy Governor of the Bank of England, has referred to it as a ‘macro prudential weapon’. Something deployed alongside the interest rate weapon.

Be ready to welcome into our global midst sometime soon a new highly potent policy instrument to be deployed in the financial sphere and to be used judiciously and wisely.

Macro policymakers are moving beyond the real economy’s ability to create instability, mainly through under or overheating and the inflation or deflation pressures this can create, directly in resource and product markets, and indirectly over the balance of payments via the currency.

For the financial sphere has (again) shown its ability to live in its own world, and to become too roguish by far if unchecked.

Financial markets are supposed to rationally discount future income streams to fairly valued present asset prices (equities, commodities, properties) using existing interest rates, by their presence and activities enhancing the functioning of the real economy.

But with the irrepressible human spirit nearly constantly wandering off the rationality reservation, what we get too often for too long in the financial sphere are irrational attempts at co-opting the credit process and leverage. Alternatively we see total withdrawal into a whimpering state of deleveraging.

Either way, emotion, be it exuberant hubris or anxious hubris (two sides of the same human medal) rule the roost for too much of the time.

Thus we frequently get rising asset prices that beget more rises which ultimately get airborne on a cloud of positive thinking and leverage, sometimes so wild that we see mushrooming bubbles forming. Only to be followed by descents into the pits of hell as all belief is lost, leverage is unwound and plunging prices beget yet more plunging until assets are ridiculously undervalued, yet cannot find willing buyers.

Such irrational deviations from fair value are damaging to the progress of the real economy, and far too frequently devastatingly so.

The regularity of such episodic disconnect between human emotion and the cold rationality of long-term economic activity, its steadfast increasing cleverness and the income streams attached thereto should be a source of wonderment.

For surely it is possible to do better, having recognized these problems? It is the ultimate optimization problem, reducing excessive fluctuations in economic and financial activity and the feedback loops existing between them.

Both phenomena show up our ultimate limitations as biological specie, apparently equating to laws of nature, forming unbreakable barriers.

Alan Greenspan, former Fed chairman and current non-person, now typified as a kind of failed New York Superman for having apparently single-handedly engineered all recent troubles (a terrible simplification, which is in the nature of all witch hunts), recognized both behaviours.

But while the one law of nature was recognized explicitly the other was more taken as implicit. That’s a huge difference, one that Charlie Bean and others now want undone.

According to Greenspan, 200 years of US capitalism has shown Americans, and by extension the world, capable of 2.5% annual increases in applied knowledge and its technical embodiment in increasing productivity of the labour force. That is, at the technological boundary. Different logic applies to catch-up stories.

Anything less than 2.5% annually over time implies underperformance, probably for institutional rather than any inherent human reasons, something that can be rectified through judicious policy action.

Unfortunately, anything over 2.5% sustained over time at the technological boundary doesn’t seem possible with our present genetic endowment. Our cleverness knows an absolute upper boundary.

We would have to change the genetic endowment for it to be otherwise, something we naturally are working towards, such being the nature of our ultimate cleverness, but that’s another story.

When it comes to recognizing madness in crowds, as much when they undervalue assets as when they overvalue them, Alan’s contribution to knowledge was to recognize that we know this for sure only after the event.

While it is happening we can never be really sure what we are witnessing. A rational response to opportunity, new innovation, underutilization of resources? Or an irrational overreaction?

It is a view of life that he will never be forgiven in this life, given the enormity of recent financial events that sprouted uncontrollably during his terms of office. Even so, only a few did see it coming and in the nature of mankind were outvoted, and ignored as minority views clearly not in tune with the times.

An old problem, that. How to honour the whistleblower. The deviant. The problem child. The social miscreant. Social groupings turf such non-conformers out along with the daily rubbish. And then reap the whirlwind.

So here comes Charlie Bean and many others now saying we need more policy instruments to address these bouts of financial irrationality in an attempt to control more adequately this source of economic instability.

Interest rate management and fiscal containment are two important macro economic stabilizers, as proven in the past. But something else is needed as supplement in the financial sphere specifically.

There has traditionally been the suggestion that interest rate policy need be more anti-cyclical, raising rates as good times heat up, heading off excessive exuberance and destructive speculative behaviour.

But there’s a rub. Interest rates get internalized in any hubris story. Short of genuine killing levels, in the process killing off the high performing economy as well, interest rates have their limitations.

If economic performance will get killed off by 15% interest rate levels, but financial gains are potentially well in excess thereof, a problem exists. How to contain the episodic financial exuberance without having to kill off the economy by crushing levels of interest rates?

Having sensible, disciplined regulations is one answer, but even when playing by the rules one finds human emotion capable of transcending the rational boundaries.

So what’s the real problem? Greed, confidence tricks, consenting behaviour of crowds?

Given a period of strong economic behaviour and lifting spirits, even a good regulatory frame and anti-cyclical policy stances won’t be enough to contain the human inclination to excess, wishing to be set free and roam where its imagination wants to take it.

So what’s the answer?

Probably still regulation, with an anti-cyclical bend, in effect allowing the human spirit to roam free as much as what it likes, but hampered by a simple leash preventing it to soar like eagles on credit leverage.

This reminds me of my mother on the beach when we were toddlers, with a 20 meter rope attached to her one leg, and a forever exploring baby on the other end, happily wandering off among all the closely packed beachgoers and never getting lost, always remaining teetered to mother, to general hilarity.

One can do that by manipulating bank capital. Banks effectively lend out multiples of their available capital. But instead of this being a constant, one often finds in good times erosion of the boundaries. Banks’ own leverage tends to rise, as do those of their clients, again illustrated by the recent global episode. In the process, enormous credit juggernauts can get underway.

It is suggested to raise bank capital ratio requirements in good times, and lower them in underperforming times (when banks in any case tend to become cautious), effectively targeting general leverage.

It isn’t yet clear who should wield such power, central banks or financial services boards. Each country will solve this problem differently.

But if you can’t directly address greed without hampering unduly the creativeness of the economic process, nor completely eradicate confidence tricks through regulatory corsets nor fully contain untested financial innovations, nor will want to destroy performance through excessively high interest rates, there remains one possibility.

Directly contain leverage. Don’t let sources of credit in the economy to mushroom uncontrollably, fueling excessive leverage.

It would require human intervention in market processes, where we cannot be sure about the expertise required to minimize the damage to sustainable economic progress while trying to limit financial excesses.

It is something Alan Greenspan was quite outspoken about, claiming not to know when enough was enough, qualifying as financial excess and potentially damaging to the economic outlook.

But given recent experiences there are enough people around the world now prepared to differ. If it looks excessive, sounds excessive, smells excessive, you can bet your bottom Dollar it is excessive, with a price to pay eventually. Prevention being better than cure (at least in the present episode of financial disruption), opinion favours the creation of a new weapon, most probably some kind of cyclical variability in tightly controlled bank capital ratio requirements.

And of course yet more transparency in financial affairs.

As with the level of interest rates, the judgement required over time where to pitch things will decide the difference between promoting optimal performance outcomes as compared to causing underperformance.

But too much damage has been incurred, too much systemic risk absorbed for it to be different. By living extremely dangerously for a while, incurring grotesque penalties, the world is ready for its next policy innovation.

Charlie referred to it as a Macro Prudential Weapon. We could call it Prude for short. Keeps you short when you want to go long.                

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics

The great global financial crisis of 2007-2009, its subsequent severe recession and the failed deflation of 2009 lie behind us. Ahead stretches a new global economic expansion.

But of what duration and quality?

Short and violent, marked by much real and financial volatility, and ultimately cut short in young adulthood (less than five years)?

Or could there be another long growth goldilocks in the making, stretching for a full decade of ten years or more, now that the world economy has cleaned out its tail feathers like a Fifth Avenue Cold Duck (remembering the advert for a local variety of sparkling wine)?

Well, it ultimately depends on what you believe or want to believe about what has just happened, and the extent to which the tail feathers really have been cleaned out.

Focusing on the trauma first, the OECD world will be going ex-credit for a while. This means no excessive leveraging for banks, or commodities. But also not for households, and their housing and credit cards.

This doesn’t necessarily mean the end of credit, securitization or even leverage. But for now it means no excess. That partly reflects experienced pain but also intensified regulatory oversight, self-imposed tightened credit criteria and precautionary real interest rates.

So the rich West will be back, but humbled, and less credit intensive. Households for a while will save more even as governments try to get their emergency money back (probably at a profit), normalizing their national debt ratios and budget deficits. Central banks will try to normalize liquidity provisioning and real interest rates.

In an unchanged world, this would mean a reduced growth potential, as the previous specialization of the 2000s implied that the East produced, saved and recycled while the West dissaved, consumed and indulged in leveraged speculation.

If the Western part of this equation temporarily breaks down, as old fashioned discipline and frugality dictates balance sheet repair and saving at the expense of consumption, speculation and growth, what else could possibly change in the world?

Well, even without the benefit of a Bretton Woods 11, for such forums never really arrange anything except in a state of war when serious decisions are possible, the Eastern sense of self-preservation may well dictate an independently engineered change of course.

Indeed we observe it in the middle of the current crisis.

The East is willing to cut interest rates and boost fiscal spending in support of domestic growth. Even as its export potential temporarily dwindles, the policy emphasis on domestic expansion limits the cyclical easing in their growth. It will also be central to an early Eastern growth revival into 2010. Export growth could well be secondary, for the first time in six decades.

In this coming new long expansion, the East could lead and reinforce Western growth recovery by offering export markets. The Western recovery in turn eventually may again boost Eastern export demand. And so on.

In a world seriously gone below potential in 2008-2009, with lots of resource slack and low capacity utilization, there will be many years of good growth ahead before new overheating and excesses announce the cyclical end.

Except that there is one rotten apple in the global system that hasn’t be fully addressed. Commodities.

Reduced demand during 2008-2009 has created excess commodity supplies, and has greatly lowered prices. Except it may only be terribly temporary in nature.

Key commodities will have lowered supply through output cutbacks, especially oil. Investment in new capacities will have been drastically cut back, also in alternative substitutes. Thus the long-term bottlenecks existing in some of these commodities will not have been addressed much, if at all, ready to explode anew at the first whiff of renewed demand growth.

Oil especially is a worrisome case. World demand may have radically fallen off, but supply has also been seriously compromised during 2008-2009.

Come global demand recovery from 2010, it won’t take all that much for the 2003-2008 experience to repeat itself, possibly more virulent than before, as peak oil may (or may not) be in play. Certainly limited new investment will be a factor curtailing new supplies, even as old suppliers disappoint and alternatives and substitutes take longer to materialize, because the interim incentives disappointed when oil went back to $30-$50 for a good while.

When the global screws tighten anew, the next inflation rollercoaster may be upon us before we fully realize it. And it may, again, become reinforced by a currency Dollar rollercoaster.

At the moment the Dollar is getting favoured by the global risk aversion favouring US safe havens, global investments being liquidated and streaming back to the US and Japan, firming the Dollar and Yen.

In addition, global corporate entities which were serious Dollar borrowers in good times, are desperately trying to cover their exposed Dollar liabilities, further adding to the artificial high demand for Dollars while putting selling pressure on just about everything else.

But this firestorm will also end, probably sometime in 2009. By then, capital remittances back to the US and Japan will cease, foreigners will have fully topped up on cover, and reduced risk averseness will encourage new Dollar outflows. Not least because the exceptional US liquidity conditions and low 0%-0.5% Fed interest rates will encourage it.

Even if the Fed starts to reduce excessive central bank liquidity provisioning from late next year, and starts upping US interest rates into 2010, there will presumably still be a global liquidity overhang for some time.

The Dollar could therefore plunge anew into 2010, boosting the attractiveness of EM high-yielders and commodities all over again, even if only temporarily.

So post-2009, we can look forward to new inflation resurgence, starting slowly because of lingering global resource slack, but fed by commodity constraints favouring rapid commodity price resurgence, and possibly topped off by weak Dollar boosts.

It isn’t as if the world hasn’t learned. It is simply that the commodity bottleneck, especially oil and gas, will prove even more problematic in the 2010s decade as it showed itself to be in the 2000s. And so the costs of this problem may show earlier, too.

With central banks extra sensitive about too much liquidity surviving from the crisis, early inflation resurgence and the moral hazards involved not fully addressed last time, they may just decide to react early.

As Rudi Dornbush claimed years ago, business expansions don’t die of old age but get murdered by central banks. And so it may happen that over-vigilant central banks, still feeling guilty about their easy ways in 2008-2009, decide to overcompensate, killing off any resurgent world inflation before it has well and truly had a chance of showing itself.

Is the next global expansion likely to be a long one? Despite a cleaned out household, housing and banking condition, with substantial resource slack allowing a long recovery period before inflationary pressures show, it may well be the special nature of the global energy bottleneck that cuts things short.

South Africa will probably live and die with this global experience. We should benefit from the global growth resurgence and the easier capital access it will bring, along with a renewed improvement in our terms of trade as export commodity prices outperform once again.

As the global commodity pipeline starts to show its inflationary potential, our precious metals may benefit, though any new global car demand falloff through 2015 would be also to our detriment.

If the SARB responds with vigilant early interest rate tightening to higher inflation on top of an unchangingly high current account deficit and future Rand risks, we will find ourselves back in 2006 ere long. And it may well happen before 2015. This would suggest a modest short growth expansion rather than a vigorous long one.

It would be an economic expansion in which our durable consumer demand could shorten its replacement cycle temporarily, fully releasing vigorous pent-up demand, before encountering anew the tightening SARB leash.

House prices could stabilize, and with rising confidence levels and falling interest rates encourage a modest resurgence in residential investment, even if working-class and middle class backlogs of the order of a million housing units will remain important building incentives.

And fixed investment should experience renewed, if modest, resurgence as global demand recovers and our industrial capacity utilization improves.

Only our export capacity may remain doubtful, reflective of the same constraints that have been so noticeable in recent decades in limiting long-term expansion.

But at least the next business expansion beyond 2009 may cover one full political cycle, limiting populist instincts at the next election round in 2014. One should always be thankful for small mercies.

After a new global mid-cycle moderation, around 2014-2016 (coinciding with the successor election to a graying Barack Obama or his successor), it will be back to the next short economic global expansion.

Short again? Probably yes, for peak oil, climate change, and baby-boomer demographic interchange will be looming worldwide, and nothing as expensive has ever been invented, except pointless 20^th century moon shots and world wars.

These combined challenges can only be inflationary in their collective global impact. And you will know what that means to central bankers forever on the lookout for containing inflation.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics