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The New Economy

Stocks soar. Is Wall Street's party premature?

Stocks soar on Wall Street, but does economy justify the party?

By / November 9, 2009

Wenhua Guo (bottom right), chairman of Duoyuan Printing, watched the initial public offering of his company Nov. 9 on the floor of the New York Stock Exchange. Stocks soared as Wall Street cheered the continued easy money policy from the Group of 20 nations.

Brendan McDermid/Reuters

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If the economy's as weak as many analysts think it is, someone forgot to tell Wall Street.

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The major indexes soared Monday with the Standard & Poor's 500 index notching a streak of seven up days and the Dow Jones Industrial Average closing at its highest level in 13 months. The Nasdaq was not far behind, closing up nearly 2 percent.

One reason for the euphoria: a weekend communique from the Group of 20 nations (.pdf) emphasizing the continuation of the cheap-money party (officially, "our extraordinary macroeconomic and financial support measures").

That's nice. Countries around the world are holding down interest rates, which helps banks earn huge profits so they can get back on their feet. Several governments have subsidized construction firms and car manufacturers to the tune of billions of dollars. The US has helped first-time home buyers and, now, homeowners who want to move.

But at some point, the economy has to grow without all that help -- and it has to grow robustly enough to begin reemploying the people who have lost their jobs. Typically, that will happen when consumers begin spending and businesses begin investing again. The latest federal reports don't show that happening soon.

On Monday, the Federal Reserve's survey of senior loan officers suggested that credit conditions are getting back to normal for many sectors of the economy. But consumers and businesses are not taking out new loans, which suggests they're cutting back on debt instead, according to Paul Ashworth, an economist at Capital Economics, in a written analysis. "This deleveraging is another reason for fearing that the recovery will ultimately disappoint."

Wall Street, of course, is famous for anticipating events several months ahead. In this case, it may have started to party too early.
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