Bust and Boom and Bust?

Jeremy Grantham is a widely followed money manager who spent a lengthy amount of time with Mario Bartiromo earlier this week (29 min interview available in CNBC video logs).

In sum, Grantham stated that the Fed's recent moves were intended to exude investor confidence and help the stock market pop, which in turn would encourage spending and sustain the current economy recovery.

Grantham went on to state, however, that the easy money move by the Fed would only end up resutling in a boom-bust cycle like that of 2003 through 2008. More importantly, at the time of the next bust, the US would not longer have the option of stimulating the economy out of recession (since it will be so heavily indebted already).

While I certainly believe that this outcome is possible, I believe it hinges on one assumption: that the Fed's move (or future moves of QE3, QE4 to infinity and beyond) will work in causing economic growth in the near term.

I posit that QE2 will result in diminshed results (with additional QEs resulting in even more diminshed returns comparitively). This would mean we would have an economic malaise and very possibly an environment of stagflation (whereby high inflation results in emerging markets and is this transmitted to the US via our imports -- combined with lackluster economic growth and wage gains).

I also posit that the markets have currently priced in QE2 fully. And are now digesting whether to price in a near term economic boom (which would be followed by bust according to Grantham and history in general) or the more dire stagflationary environment.

Regardless, don't both cases leave you back at "Go" in the end?

The absolutely MUST in order to prevail against any future busts (and to provide fertile soil for future economic growth) is to fundamentally restructure the systemic causes of US debt (healthcare, social security, housing, etc). Any political failure to do so will most certainly leave us doomed to repeat 2001, 1988-1992, 1982-1983, etc.