Opinion: Obama's Strategies Will Work

3) Bank credit will expand

The Federal Reserve has injected massive sums of money into the U.S. banking system, yet credit growth has slowed materially, harming the U.S. economy. In 2009, this situation is likely to change as a result of many factors, in particular because the Federal Reserve is likely to find the right number with respect to how much money is enough to jumpstart lending. The Fed has already expanded its balance sheet by about $1.5 trillion to $2.3 trillion, and excess bank reserves have increased from near zero to about $700 billion, bringing cash assets at commercial banks to over $1 trillion for the first time. Yet it has not been enough. At some point the Fed will find the right number, as was the case with the LIBOR problem, and the money multiplier will increase and result in new money supply (remember, only banks can expand the money supply). Also likely to boost bank credit in 2009 will be broadening recognition by bankers of the disparity between returns on securities holdings versus those that could be earned from net interest margins (the difference between what a bank pays for money versus what it earns on loans). Banks keep about 25% of assets in securities, which these days are earning far less than can be earned on loans (net interest margins for loans are typically between

3.5 and 4.0%age points, data from the FDIC show).

4) Emerging markets will be set for a second leg of the secular bull run

I said in the spring that with investors loaded up on one side of the market in commodity-related investments that the U.S. dollar would be the main beneficiary of a decline in commodity prices. Investors were long commodities outright, as well as the stocks, bonds, and currencies of countries benefiting from higher commodity prices. Investors were also long the stocks, bonds, and currencies of countries that were indirect beneficiaries of the commodity run. For example, Eastern Europe was on the receiving end of cross-border deposits sent from throughout the world, in particular OPEC. The massive unwinding of commodity-linked trades caused major dislocations in emerging markets, where many countries have learned valuable lessons, just as was the case in Asia following its financial crisis in the late 1990s. For example, Eastern Europe is sure to take actions that mitigate the effects of any future changes in cross-border flows. China will reduce its dependency on exports and boost domestic consumption -- possibly by increasing its social safety net, which is a chief cause of its high savings rate (the lack of equivalents to the U.S. Social Security and Medicare systems is a strong motivation to save in China). Emerging markets countries that prospered before the financial crisis will basically look in the mirror, identify areas of weakness exposed by the crisis and exit them with a stronger foundation for future growth built upon solid fundamentals. A good example is Brazil, with its relatively young population -- a median age of about 28 years compared to 37 years in the U.S. and 44 years in Japan, data from the Central Intelligence Agency show.