The Western world's key finance ministers have begun planning "exit strategies" to wind back their economic stimulus packages, amid growing confidence that the global recession will end sooner than expected. As the International Monetary Fund reportedly prepares to lift its forecast of global growth in 2010 from 1.9 per cent to 2.4 per cent, the G8 finance ministers spoke of "signs of stabilisation in our economies". Rising confidence is turning around the prospects for interest rates. The Commonwealth Bank today is expected to lift its fixed home loan rates by up to 0.55 percentage points for new lenders, following Friday's announcement of a 0.10 percentage point rise in variable rates. – The Business Day
Dominant Social Theme: Wasn't so bad after all.
Free-Market Analysis: Well, the G8 has met and apparently contemplated the beginnings of a prolonged victory celebration. We don't wish the world or its global economy ill, but if markets continue to rise, we shall surely be subject to this. And by THIS we mean the hosannas of central banking types as the media slaps them metaphorically on the back while they themselves are doing the same thing — so powerfully no doubt that they will risk breaking a collective arm.
For those of us who believe the current system is fairly flawed, it will be an obnoxious sight. The barrage of happy talk will continue agonizingly, for as long as it can. And we will be treated to the usual summations. News announcers will make pudgy-faced men with bad toupees into heroes because they "jumped back in when others didn't dare." (They won't mention these men were likely connected to the financial establishment and have access to trading information most do not.)
But there's more. The implicit message is that those who lack confidence in the "market-based" system got what they deserved. Just like some poor trucker-driver who lost half his retirement funds — and pulled his remaining wad from the market – was a fool to panic. He and others like him will be served up as examples of those who lacked the courage and perspicacity to provide for their families. They will be made to feel guilty. And perhaps they will feel so.
The blizzard of articles and newscasts will continue. Never mind that you will hardly ever meet a normal person that "jumped back into the markets" in January '09 and participated in the current rise. Trump will no doubt hold a news conference to explain that he was fully invested by the end of January ‘09. And word will leak out that Warren Buffet, too, has made a killing (though hardly enough to make up for what he lost). And then the buy-and-hold crowd will kick-in as well. It was reasonable to hold onto blue chippers when the markets were down 50 percent, they will note. (Even though the American Treasury secretary was telling insiders on a hush-hush basis that the American financial system had been hours from total meltdown in September '08, the point will be made that faith in free-markets is all that is needed. To which we respond, what free markets?)
This sort of system is impossible for ordinary people to navigate, in our opinion. It is based (especially in the past year or two) on arm-twisting, monopoly money and market manipulation – little of which has been honestly reported. And we are not certain that reporting will become more honest in the near future. Markets may rise, but we will bet the real world economy will remain in sad shape. Credit will remain constrained, jobs scarce and foreclosures continual. There will be commercial defaults as well and derivatives blow-ups. This is because the mal-investments cannot easily be soothed this time around by a blizzard of paper money.
The collapse was nearly total – and thus the remedy may prove just as dangerous as the illness itself. And for this reason, we find a V-shaped recovery hard to credit. The main issue is that panicked central banks have unloaded literally trillions of electronic dollars into the larger economy via money-center banks and through corporations. This has in turn set up the possibility of a good deal of price inflation.
Central banks can always try to drain inflation (paper money) out of the market – but the point is not that they can do it, but will they do it and when. This dilemma is already rearing its ugly head in an Australian row over interest rates – as is portrayed by this excerpt from the same article as the one above:
While the World Bank warned last week that the outlook for developing countries was getting worse, not better, the rising confidence in the developed world helps explain the Commonwealth Bank's moves to lift interest rates. Prime Minister Kevin Rudd and senior ministers yesterday flung more angry words at the bank's decision. Deputy Prime Minister Julia Gillard said the Government was "furious", while Family and Community Services Minister Jenny Macklin said mortgage holders had "every reason to be furious". Mr. Rudd was more diplomatic. "Everyone in Australia is pulling together to tackle this recession", he said. "I would say to the Commonwealth Bank: join us, and don't pull in the wrong direction." (The Business Day)
One sees the dilemma presenting itself. The finger-pointing has begun. If one starts draining money from the economy too soon, then one risks the possibility of choking off the recovery that has started. If one waits, and price inflation gets a foothold, then another downturn is almost inevitable if the central banks truly wish to try to keep their paper-money economies on an even keel.
The money that central banks dumped into commercial banks and provided to foundering industries has not found its way into the real economy, but has perhaps found its way into stock markets – hence rising equity prices. But unless lending takes place, the world's economy will remain dangerously tenuous no matter what the marts do – and, eventually, unless the real economy takes off, the marts themselves will run back down.
The G8 can speak among themselves of raising rates, but we wonder how many will be courageous enough to do so, and when. With so much money flowing through Western economies, it would seem price inflation is almost a given. Thus, we do not think this particular business cycle is over, or that a new and more promising one has begun.