Is the bubble about to burst again?
I don’t want to be the Grinch over the Christmas period but there is plenty to be worried about around the world that could lead a repeat of past mistakes
It’s the party that won’t stop. The Dow Jones Index of US shares broke through the 20,000 level last January heightening concern that the bubble was about to burst. But then it just kept going and topped 23,000 recently in the second longest ‘bull-run’ in history. World shares also hit record heights in 2017. Meanwhile crypto currency Bitcoin soared from being worth zilch per unit to nearly $20,000 at one point this week.
Irish shares are flying high too and property prices here are nearly back where they were pre-crash.
Despite Brexit and several existential crises in the EU, the Irish economy has gone from strength to strength.
Unemployment is set to fall to 5.4% next year, which means everyone who wants a job can have one – a far cry from the misery of almost 16% joblessness just five years ago.
Property prices are soaring, which is bad news for renters and first-time buyers.
But this is the main way ordinary people can generate real wealth to be passed on through the generations.
If they keep going at even half the current level, average urban householders will be millionaires with an asset worth seven figures by the time their mortgage is paid off. But surely something’s gotta give? Greed-fuelled soaring asset prices surely must come crashing down sometime? There is plenty to be worried about. Donald J Trump, for example. Need I say more? The Bitcoin backlash was already under way as it’s value plunged on Friday to $13,000.
And then there’s those perennial party poopers, the International Monetary Fund? Remember them?
The international bailout fund was a member of the Troika that rescued Ireland and it knows a thing or two about busts. In a recent Global Stability Review, its top financier warned that greed may have gone too far with too much money chasing too few assets. Some senior monetary officials are also secretly admitting that they are worried.
Private sector borrowing in the G20 most powerful economies is now higher than it was before the financial crisis.
There is also a fundamental flaw in the richer economies, many doomsayers predict. The debts that caused the crisis of 2008-2012 didn’t go away; they were simply passed on to governments and Central Banks. But they are still lurking on their balance sheets.
In response to the crisis, the US Fed, European Central Bank (ECB) and Bank of Japan have also been printing so much money that they routinely talk about ‘trillions’ instead of ‘billions.’ What’s next? Quadrillions?
They have cut interest rates to unprecedented lows – below zero in some cases.
The European Central Bank has gone from tight-fisted conservatism to having a free-wheeling Italian president Mario Draghi who has printed and basically given away trillions of euro in an effort to stimulate the EU economy. Many inflation-paranoid Germans with long memories of needing suitcases of banknotes to buy bread in the 1920s are aghast.
Didn’t inflationary moneyprinting policies trigger the worst period in history with a recession that led to the rise of Hitler?
Top politicians from the CSU party there want a new German ECB head steeped in Teutonic
conservatism to restore the credibility that they say has been undermined by Draghi. They worry that when interest rates start rising again and the money printing inevitably has to stop, the ECB will have little ammunition left to fight any crisis that might emerge. There are other threats to economic stability.
From North Korea to Iran and the Middle East, there are plenty of potential trigger points for a global economic downturn.
Cyber attacks are bad enough already but could reach a new level of destructiveness bringing down electrical infrastructure that would cripple the US economy, some commentators warn.
China is an incredible success story economically. But has it gone too far too fast? Private debt is over 300% of national output.
A slowdown in what is now the world’s second biggest economy could drag down the rest of the world. Political upheaval in the EU is never far away and it could resurface with fresh elections and a realignment of anti-immigration Eastern Europeans along the lines of the old Austro-Hungarian empire wresting control from traditional Franco-German axis. Hopefully, none of these things will happen. Or if any do, the world will cope as it always has. There are also reasons to be optimistic. The EU always seems to muddle through its political and financial crises and fears of a lurch to the far right in 2016 were proven seriously unfounded in Dutch, French and Italian elections. The stock market bull-run may be the second longest in history but it’s far from the biggest, dwarfed by the 1990s surge and several others. It was also rising from a low base after the appalling downturn of 2008, when the Irish Iseq index plunged from nearly 10,000 to just over 2,000. The stock market is due a correction anyway and when it comes it may not be the end of the world.
Investors who’ve enjoyed huge gains will have some of them pared back. Unless there’s a truly catastrophic crash, the only ones who’ll lose out are the relatively few who bought shares in the past year or two. Long-term investors will still be on top, as they usually are.
The Irish property hikes of recent years are also from a low base and we are only starting to get back to the level where it’s worthwhile to build houses again.
Scarce supply will keep prices up for years to come.The days when China’s economy surged by 10% every year may have gone. But the latest figures show it’s still growing at 5%, which is pretty impressive.
And maybe, just maybe, Mario Draghi has got it right.
Maybe his monetary policy is the financial equivalent of the Italian engineering behind a purring Lamborghini rather than a clapped-out Fiat. It’s worked so far anyway. Maybe we have entered a new era of low interest rates and high asset values for the long run – and any downturns won’t be so bad after all.
Let’s hope so. Happy Christmas!