2009 Economic Prediction *Bumped and Updated*

*Originally posted February 15, 2009* I know this is a little late, but I was waiting for Congress to spend another trillion dollars or so before committing my prediction to the public.  Here goes:

GDP and unemployment will  flatten and even improve a bit in first half of 2009 for a couple of reasons:

First, people will begin to look for excuses to spend money.  This includes businesses.

Second, the hideous transfer of power from individuals to government that passed Congress on Friday will have a psychological effect on people making some believe that things will get better soon. 

Together, let's call this mass hypnosis.

That hypnosis, though, will wear off when we begin dissecting first quarter 2009 numbers in April.  The reality will then hit home:  downward economic trends slowed or reversed because things couldn't get much worse.  (Again, this is the psychological feeling, not economic reality.)  In other words, people will stop thinking "It's getting better," and start thinking, "We're stuck on bottom."  It'll be like old WWII submarine movies where the disabled sub settles on the ocean floor.  The crew's not out of the woods--oxygen will run out eventually--but they've stopped descending toward collapse depth. 

Then, of course, some idiot seaman rolls a bowling ball toward the bow, a rock they're sitting on gives, and the sub starts sliding into 38,000 foot trench. 

The other economic bowling ball that will hit the pins in early summer is Treasuries.  With the uptick in private sector activity and the flood of Treasuries hitting the streets, investors--especially China--will shift their purchases away from government debt.  This will drive up yields quickly until equilibrium re-establishes.  I don't know what the level will be, but it will be high.  

Having obligated over $65 trillion (with a "t") in promisory notes since September, the US government must issue massive amounts of bonds.  If you're a bond salesman with crateful of US Treasuries, a weak economy is a wonderful thing--there's nothing else for investors to buy.  But a growing economy makes Treasuries, which are now riskier than ever before, a less attractive alternative.  Stocks and corporate bonds offer the possiblity of recovering some of the losses of the 50 percent stock market dive.  Treasuries do not.  Not until their yields hit the 12 percent range.

High interest rates will cause already skiddish companies to pull back even more, touching off a new round of layoffs and another dive in both stocks and GDP.  

Of course, I'm just a computer guy; I could be wrong.