All this talk of a new financial apocalypse, so soon after the last one, is starting to annoy me. Partly because investors as a crowd are so irrational; -partly because so much that governments and central banks have done to contribute to the current market mayhem seems to work against the sensible efforts of ordinary folk to build a bottom-up recovery.
Markets first. We’ve had hissy fits about China, even though connections between the Chinese and UK economies are so marginal. We’ve had near-hysteria about the prospect of (and in the US, the start of) rising interest rates. Now there’s a panic about European banks, because Deutsche Bank, midway through restructuring, looks weaker than it should; within days, traders are reassured about Deutsche but down on Credit Suisse. By the time you read this, they will have spotted another weakling — and short-sellers will make another killing out of it.
So it goes: markets are not just unreliable indicators, they are also populated by chancers and fools, and that makes them dangerous as mood-makers. If shares go on sinking, accompanied by swirling rumours about banks, then whatever the underlying truth, consumers will feel less confident and businesses will postpone investments and hirings. And we’ll talk a just-perceptible slowdown of a relatively healthy real economy straight back to recession.
But what is ‘the underlying truth’? And what have our leaders done to correct it? The ultra-low interest rates thought vital to stave off depression seven years ago are now a huge problem. Raising them could turn a ‘looming debt crisis’ into a real one, as well as provoking a bond-market crash; keeping them this low until the end of the decade, as now looks possible, would encourage the wrong borrowers to pile on more debt; turning them negative, as is happening in Japan, Sweden and Switzerland, looks like sheer desperation.
As for pumping liquidity into stalling economies through quantitative easing — for more of which the eurozone is anxiously hoping — we can see that it has diminishing returns, and adverse after-effects in the form of artificially boosted asset prices that are waiting to fall.
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