Lessons from the past
For the 42nd time (the meaning of life for Hitchhiker’s Guide to the Galaxy fans) the leaders of U.S., Japan, Germany, the UK, France, Italy, and Canada met in Ise-Shima Japan for the G7 summit. As seemingly always there were many global woes to discuss. Not least and perhaps the worse conundrum, economic growth. Some are for spend their way out of trouble, including Canada, while the UK and Germany are very much for austerity.
We’ve had the great recession and it wasn’t as bad as it could have been thanks to some pretty desperate measures from governments and central banks. We’ve had quantitative easing (QE) that’s printing or creating money folks to explain it in it’s simplest terms. Gone are the days of the gold standard or we would have been up to our necks in the brown stuff years ago.
QE doesn’t look like it has worked so now central banks are rolling out negative interest rates. Paying someone else to look after your money and getting less back than you put in. Call me stupid but that doesn’t sound like much of a deal.
Economic theory, which to me is as about as sound as throwing bones on a cloth to tell the future, tells us that growth makes everything better. Yes, it would. If growth was sustainable, predictable and reliable.The trouble is that looking back over the decades growth has peaked, troughed and even stopped altogether.
Growth is a natural thing in nature but it levels off, declines then dies in almost every case I can think of. Diversification is something else altogether. Nature is full of examples and will be again of the diversification of species. I guess my point is that we cannot expect, rely and gamble on growth getting us out of this economic mess. More banks should have been allowed to fail in 2007/2008. However, bad behaviour was backed up by more and now I feel the headwinds are building again.
For my sins and for my job I watch and listen to the business channels. I learned last week that we are apparently in a bunny market. There is a bull market (buying), a bear market (selling) and now bunny (hopping up and down). I guess seeing some charts this analogy works.
A major factor of the great depression in the 1930s in the run up to WWII was the stock market crash of 1929. Stocks were available to many more people and many stocks quadrupled in value in a very short time. Investors, individual and corporate, borrowed heavily to invest more. There was a stock market correction that led to panic and the correction led to a crash. People and corporations were wiped out.
In our electronic age it is all to easy to trade stocks. In fact, it is actively encouraged on big money TV ads to be a frequent trader and to borrow money to do it, anywhere, anytime, anyhow. I fear the seeds of another, perhaps worse crash have been deeply embedded. In a low/no interest environment it is tempting to bet your savings and borrowings on a higher return. You can’t lose, right?