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Can things only get better? The optimists are hoping that in 2009 mean reversion will work its magic.

Can things only get better?


The optimists are hoping that in 2009 mean reversion will work its magic. This year was painful so, the logic goes, next year is likely to be better. What goes down must rise up again.


In a trivial sense this point is true. If a situation is particularly bad it is likely that, at some point, it will improve. But such a truism says little.


On this logic 1930 should have been a much better year than 1929. Unfortunately it took several years before the Great Depression passed its worst.


It is not that the current situation is akin to the 1930s. I have argued several times that such a comparison is not apt. However, the specifics of the current economic and financial crisis need to be examined before any conclusions can be drawn about when it is likely to end.


It looks like the world is still in the relatively early stages of the downturn. Grossly inflated asset bubbles have burst and national authorities have struggled to contain the mess.


A lot more obstacles looks likely to need to be overcome. At some point, perhaps in 2009, perhaps a little later, inflation looks set to emerge as a threat. And revamped Keynesianism, now enjoying a renaissance, is likely to be discredited.


Things should get better eventually. But the road will be a rough one.