A question of balance

The familiar backdrop of crises leading to bail-out announcements, market intervention and liquidity injections, which in turn boost markets looks set to remain for some time.

It is noticeable however that each so-called stimulus has a progressively weaker effect.

The problem with these initiatives is that they are aimed at providing temporary relief for the symptoms of what ails the world economy, rather than tackling the structural illness (of too much debt and severe imbalances in competitiveness, set against a backdrop of deteriorating demographics).

A question of balance

Driving interest rates and bond yields ever lower from their current rock-bottom levels is unlikely to make much difference to the real economy and arguably can create more problems than it solves.

Unintended consequences abound when policy designed for an emergency is kept in place for years: savers and investors become increasingly disillusioned, ‘risk’ is mispriced, capital gets misallocated and capital markets, increasingly subject to state intervention, become increasingly dysfunctional and distorted.

In denial

Our deleverage theme reminds us that the credit-driven excesses which are at the root of the current crisis are a global phenomenon.

There remains, however, an underlying denial of the problem, a belief, for example that the markets are simply treating (say) Spain unfairly, rather than seeing this as an indication that the bad debts in the system may be much worse than the authorities might be owning up to.

With 10-year bond yields of 6% or so, Spain is currently borrowing at rates in line with its traditional borrowing costs. The difference from much of the last 30 years, however, is that those interest costs are rising.

A similar denial is at work in the UK, where the population is already turning against apparent austerity (even though public spending has continued to rise) and there are calls for us to choose growth.

This article continues…

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