The Perfect Calm

We may not be out of the economic storm yet.

Many commentators likened the Great Recession of 2008-09 to the overused analogue of the “perfect storm.”

The original “perfect storm” was a Halloween Nor'easter that formed from the chance confluence of a high pressure system, an “extra-tropical low” and the remnants of Hurricane Grace on Oct. 31, 1991. It was a surprise hobgoblin of a storm that provided much more than the usual creaks, howls, and lightning usually associated with all saints' eve.

The perfect storm of 1991 became the last hurricane of 1991. It came and went so quickly that it wasn’t even given a moniker – it was over before they could name it.

The perfect financial storm formed from the unexpected collapse of Lehman Brothers, the loss of markets for collateralized debt obligations (CDO's), and a collapsing real estate market in the United States. We managed to name it the “Great Recession” long after the fact.

So what do we name the unbelievable financial lull that we now find ourselves in? I suggest the Perfect Calm of 2010.

Living in the “perfect calm,” what others call the “eye of the storm,” is disarmingly placid. Interest rates have almost reached zero, an historically low standard. If you can borrow, money costs next to nothing. The financial system is awash in credit, which it is using to back both good bets and bad. We are awash in liquidity. Real estate is surging on a wave of available credit. Happy days are here again for those who can secure retail credit. Meanwhile, stimulus budgets send borrowed money across the land, searching for the ever-elusive shovel-ready projects that stimulus budgets crave.

But lest we forget, the wind shear at the edges of the perfect calm are edging ever closer and it may not be long before we once again find ourselves in stormy weather .

Why?

First of all, we all know that with record-low interest rates, inflation is bound to rise, which means it's only a matter of time before interest rates go up as well, making the cost of borrowing more expensive. Secondly, we know that money is going to get tighter. As interest rates rise, credit is going to become harder to get. Finally, the federal government has already signalled that 2010 marks the end of the feel-good stimulus budgets. Next time, there will be less money for everything.

Let's remember that after the two big recessions of the 1980s and 1990s, interest rates were high and governments could predict recovery because all they had to do was lower the rates and the skies cleared. This time around things are very different as monetary and fiscal policy can only get tighter while governments will be tapped out.

This recession isn't over, it's just taking a breather.