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Rebalancing happens. A constant refrain of the past several years has been that the global economy is too unbalanced--the West has too much debt, China doesn't have enough consumer spending and so on--and the old growth models don't apply. Well, now that we can see everyone in their skivvies, there's a real impetus to change. In China, for example, the state is trying in fits and starts to clamp down on a credit bubble by forcing banks to stop making so many loans. If successful, it could be a step toward a more sustainable economic model, which is desperately needed now that growth is slowing.
The big question is what will happen in the U.S. The Fed signaled its intent to taper off QE because it sees evidence that the U.S. is finally in a real recovery. And there are reasons to think so. Consumer confidence has reached levels not seen since before the financial crisis, housing continues to strengthen, and unemployment is slowly but surely falling. Yet pessimists can point to just as many opposing data points: First-quarter GDP was recently revised down to 1.8%, wages are flat, middle-income jobs are scarce, and long-term issues like education and health care reform loom. Markets may not always reflect the real economy, but over time, they ultimately converge. The coming post-QE era will reveal much about the health of both--and who went swimming with their trunks on.