A Brave New World?

With 2008 coming to close we have seen some unprecedented moves by the Government and it's entities. A lot these moves haven't been seen since the 1930's. One of my main worries that will be documented in this blog is that government intervention and its unintended consequences may result in another depression. However the main subject and the inspiration for this blog is the "Wedge Effect".

First we must understand the economic term Crowding Out. Investopedia has a decent explanation for it and to summarize it is when gov debt "crowds out" individual & corporate debt and increases interest rates for all. However in our new economic times we are seeing what I would like to coin the economic "wedge effect". Where a decrease in the collective risk appetite through fear creates a high demand for "risk free" government or government backed assets (ex. CDs within the FDIC limits). Coupled with an economic slowdown and a healthy dose of deflation the effects can be catastrophic to risky assets. And like a wedge the farther out you go on the risk scale, the higher the interest rates and/or the risk premium required for the asset to be palatable for investors.

My plan will be to fine tune the definition, its effects on our economy, and current events & policy that will shape the future. Hopefully this forward outlook will provide insight to our brave new world and create opportunities for us. Even if the opportunities in of 2008 have been few & far between.