You are herePrem Watsa: Be very wary. De-leveraging can take years.

Prem Watsa: Be very wary. De-leveraging can take years.

ZENWAY's picture

By ZENWAY - Posted on 16 January 2009

Prem Watsa, the man who made billions from the financial meltdown, recently said: “We can’t tell if we’re at the bottom…We are positive and hopeful for the future but need to watch for signs that stimulus is working," he said in a phone interview. “In a few days, Obama will become president and announce spending of up to US$1 trillion. There will be excitement All of that’s good but the question we all have to ask, and is being asked, is will that amount be sufficient to compensate for the de-leveraging that’s taking place across the economy in the US, Canada and worldwide.”

The crux of the problem
“De-leveraging” is hoarding, paying down debt, postponing expenditures by banks, individuals and companies which is contributing to the recession and deflation of prices, he explained.
The two historical examples of the serious meltdown the world now faces occurred in the 1930s after the 1929 market crash and Japan’s economic malaise since its 1989 meltdown, not as severe but nonetheless serious.
“In the case of both those data points, the de-leveraging was so severe that even though governments built infrastructure and interest rates went to zero the economy did not around,” he said.
“De-leveraging means that the value of houses, for instance, have to go down so low that people will start to turn around to buy them again. It means that factories with excess capacity will have to close until demand returns and makes surviving factories busy again,” he said. “It might take four or five years.”

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