Friday, August 19, 2011

A long roller coaster ride

Financial markets reacting in a manic-depressive manner under times of uncertainty. At the moment, when no one is really sure where the next wave of economic growth and recovery might come from, and where there are serious fears in the background (at least) that we are headed for a double-dip recession (showing the delusion of financial markets--if you were normal, you'd know that we've never gotten out of the one we entered in 2007). That's true of both Europe and America. Three things have been giving financial markets hope over the last year: a new bubble in technology stocks (particularly social media); a new bubble in raw materials (including gold), and taxpayer-financed welfare measure for banks and other financial institutions. 

That is a crappy basis on which to expect a recovery. The first two prospects are built on herd behaviour and inflated valuations which are exceptionally fragile. The last of these prospects not only has natural limits, but is hamstrung by a lack of political capacity. In the United States, the political landscape is so polarized that Americans are stuck with Cliffhanger Government for the foreseeable future, and may very well lurch from one debt crisis to another. In Europe, the EU and the Eurozone are proving equally incapable if not more so, of taking an authoritative decision on any way out of the crisis. 

As a result in Europe, the ECB has resorted once again to emergency purchases of southern European debt. As I've written in my post on the rise of General Trichet, that emergency action is coming with special powers, as witnessed by the humbling of Silvio Berlusconi. That's right. Berlusconi is a very difficult man to humble, in the light of corruption scandals, lawsuits and pressure from Brussels and other European capitals. but now we see where the real power lies. The ECB under Trichet has become very powerful indeed. How that will look in the fall is perhaps another story. The sources of the ECB's power are informal to a great degree, and a willingness to bend or break the rules to secure a greater purpose. That is a great part of Trichet's legacy, and what has kept the EU together over the last few years. What will happen once he passes the torch to his successor remains to be seen.

The roller coaster effect is sure to continue for two reasons: first, the combination of skittish markets, poor economic prospects in both America and Europe and political ungovernability in both areas mean that the world economy is in for a period of enhanced volatility for the next decade at least. To the extent that East and South Asia generate domestic demand that depends little on America and Europe, that volatility will decrease globally and provide America and Europe with new economic perspectives. But that is not going to happen tomorrow.  Until then, without a strong foundation or a government that works, financial markets will continue to freak out on an extended basis. Both positively and negatively. We saw that between the 1870s and the 1890s, when the world never really got out of recession, save for a few manias that collapsed into themselves.

Hold on to your seats.

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