Mike Norman, HardAssetsInvestor.com (Norman): Hi everybody, and welcome back to the second part of my interview with Peter Cardillo, chief market economist at Avalon Partners.

Peter, in our last interview, you were talking about the Fed and other central banks and actions by the government that have prevented a deflation. Now leading up to this, over the past five or six years, the big concern has been inflation. Indeed, we've seen materials prices rising across the board, a lot of concern about inflation, we've seen a fall in the exchange value of the U.S. dollar. All this happened very quickly, this sudden idea or notion of a deflation.

Peter Cardillo, chief market economist, Avalon Partners (Cardillo): Well, obviously, you know, when you have the credit markets seizing up and no one is willing … when the banks are not willing to lend to each other, that's a serious problem. Look, what we went through … there were signs of what happened in the early 1930s, there's no question about that. However, I think that the governments certainly have learned the lesson now in terms of avoiding a deflationary era, and that's why I think the fact that they came out with all these stimulus packages, rescue packages - whatever you want to call them - basically is the right thing at the right time.

Now, grant you, maybe the Federal Reserve and the Treasury were a little bit asleep at the wheel in the sense that they should have seen this brewing, because we had excessive real estate speculation. And unfortunately, the former maestro who created this - Mr. Greenspan that's right, who basically is somewhat responsible for this - up until his last months in office he always said, well, we have a slight bubble in the real estate market in certain areas of the country, but we don't have a real bubble.

Obviously that is not the case and we did have a bubble. But the problem is that no one knew the extent and the depth of the problem until it finally nearly collapsed the system.

Norman: Now prior to this implosion, some of the best-performing asset markets were raw materials, commodities … this idea that we have a lot of emerging new economies, developing economies; you mentioned China, India for example. Those have been some of the hardest-hit markets on the way down. With the efforts now by the Fed and other central banks and governments to sort of reflate the system to avert a deflationary collapse, will these markets and these countries resume as the leaders?

Cardillo: I think they will, but it's going to take some time. I think we can see the equity markets regain over a short period of time. I wouldn't be a bit surprised to see us recapture Dow 10,000 very shortly, but this bear market that we're in - and this is a global bear market, it's certainly not only domestic, that's for sure - is going to take a while. This bear grip that we have is not going to let loose, but we'll see an improvement. I think we'll see an improvement not only in prices but in psychology, and the key is confidence, restoring confidence, and we're beginning to see that.

If you look at the overnight interbanking lending, you'll see that the spreads are beginning to narrow, and once we get them down to levels where you'll see the credit market unclog and banks begin to lend again, that will be the key; the confidence restored in the credit markets.

Norman: Do you think what has transpired will lead to sort of a fundamental change in the way we view markets, away from this sort of free-market fundamentalism, as it's called, to where you have markets much more regulated and managed by authorities, governments, central banks, whatever?

Cardillo: Well, if you're asking me do I think capitalism is dead, the answer to that is no. Are we going to have a shift; are there going to be a lot of regulations? Yes, but I think this so-called small part of socialism that we may have entered will not be long-lasting; I think it will be short-lived.

Norman: All right, thank you very much Peter. Well, you heard it here: Capitalism is not dead, folks, so stick around here, come back; we're going to have a lot more on this interview series. Thanks for stopping by. This is Mike Norman; see you next time.