2010: Another year, another crisis

December 21, 2009

copeland1 Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own.

If the financial crisis were a theatre production of Hamlet, we would now be at the end of Act III.

But look . . . the audience is already standing up, applauding wildly and putting on their coats. They obviously think it’s all over. Little do they know how much blood remains to be spilled . . .
Look at the facts.

The FTSE is up by nearly 50 percent since March, so that it is now more or less back to where it started 2006.  The same is true of gilts, corporate debt, and more or less every other financial asset on both sides of the Atlantic and across the globe. Even the housing market, where it all began, seems to be reviving.

So the crisis must be over, right?

But the jubilation may be premature, because, since Lehman Brothers collapsed in September 2008, policymakers have used every conceivable tool of monetary and fiscal policy so as to restore the status quo ante. Indeed, the success or failure of these policies has largely been judged by the criterion of how far the numbers look normal – where the norm has been redefined to mean “similar to the levels of 2005 and 2006”.

In these terms, the policies, especially quantitative easing, have been extremely successful. In many respects (not just bankers’ bonuses), the clock has indeed been turned back to 2005.

The trouble is we know how this story ends. The world economy is locked into a cycle which will repeat itself as long as the fundamentals remain unchanged. The sequence that culminated in the crisis of 2007-8 is being repeated like a film in fast-forward.

The authorities keep printing money so as to stimulate the economy, secure in the confidence that inflation is no problem. On the contrary, there may even be a threat of Japanese-style deflation, which would disastrously increase the real burden of debt.

But why is inflation so tame? How can the U.S. money supply increase by 20 percent without affecting consumer prices? Of course, much of the new money has simply remained in bank tills, helping to rebuild reserve ratios ravaged by debt write-offs, and with relatively high U.S. unemployment of labour and capital, inflations is bound to be muted.

But all the signs are that markets are not even expecting much inflation in the future. Why not?  Look East for the answer. As long as there are underemployed peasants in the interior of China waiting to stream into its booming cities to produce the goods that Western consumers crave, inflation is never going to return.

In short, it is a rerun of  the 1930’s, but with the unemployed spread throughout the global economy, not just hanging around on the street corners of our own cities.

If the flood of newly-printed money is not absorbed by higher goods prices, there is only one alternative. Excess money balances and rock-bottom interest rates cause a stampede into higher-yielding assets, driving up their prices and reinflating the bubbles we know and love.

The nightmare is recurring, and will continue to recur until we in the West stop printing money and/or the Chinese allow the RMB to float upwards and start to spend their hoard of dollars on the schools, hospitals, roads and railways they so obviously need.

So what are the prospects for 2010? In the 2008 crisis, almost every asset class which wasn’t actually toxic became blessed as a safe haven. So while anything to do with banks or real estate were untouchable, Government securities, especially US Treasuries, dollar assets, commodities, emerging markets were all seen as safe. This time around, some of last year’s saints will be added to the list of sinners.

Three asset classes look particularly vulnerable. One, commercial real estate, is already in crisis in most countries. (Note that the Dubai fiasco is ultimately about commercial property).

Secondly, the realisation has dawned in recent months that some Government securities are actually extremely risky. Bond market investors are becoming increasingly selective, and there is a danger of a flight from the debt of the riskier Eurozone Governments.

Since the list of heavy borrowers includes not only the ClubMed countries, but Italy and Belgium too, there is a distinct danger of an EU bailout crisis with threats and counter-threats, bluster and brinkmanship as the Germans baulk at footing the bill.

Thirdly, the condition of the sickly dollar has not worsened in the last year, but nor has it improved. Americans are saving a higher proportion of their income – but their incomes are lower, and their debts are growing in real terms.

The Federal Government is still borrowing, and has added near-bankrupt state Governments and a newly-inflated healthcare budget to its existing list of commitments.

Of course, if any of these crises materialise, the short term consequences for the stock market will be negative. And even if we can avoid a crisis, we are likely to manage only insipid growth in the UK and US, given the debt burdens we carry, which would still suggest stock markets are overvalued.

So what is left? Like most economists, I share the view attributed to Keynes that gold is nothing but a barbarous relic . . .  but, as the Romans found out, sometimes the barbarians win.


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Your argurment has a sound basis, but frightens me. Firsty, what about the emergence of the “wealthy nations” and clear shift in paradigm, or the concensus of east versus western deocracies.

I think this might be slightly embellished given the Keynesian ethos rests on sound pincipals of emphatic judgement beyond economic instabilities.

Pray, do retort..

Posted by James Capstick | Report as abusive


A pretty good summing up ,
one could add that that the world is awash in digital money looking for assets to call home , a zero return now is god enough if the money is safe ,
The Atlantic west has de-industrialized itself and has now no motor for creating real value growth

There is a massive overhang of municipal , state and sovereign debt out there , what we are witnessing now is the people on board the social-democrat ship Titanic being told this financial Iceberg was only a glancing blow and the dancing could resume .


Posted by jeannick | Report as abusive

Although I agree with your most of your points, a few seem wayward:
1) Emerging (Asian) shares in fact precipitated the western financial crisis and for a time China look set to be in dire straits (they carp about US monetary policy, but they would have a lot more to carp about now if the policy hadn’t taken place). Commodotties also plunged, including gold.
2) You missed the UK off your list of countries on the periphery of EU. Admittedly we are not in the Euro and have a larger critical mass than the likes of Greece, but we do seem to be in dither mode in terms of fiscal realities and I daren’t imagine what would happen to the pound and gilts if there is a hung parialment.
3) I agree, the chinese are merely adding to an over capacity problem with their current policies. This is as much a part of the problems we have seen over the last 2 years, coupled to their dollar peg (previously the cheap credit they assisted in the US and elsewhere). There is probably over investment in some of teh areas you mentioned (but not in social areas such as health care and proper social security nets, our convoluted support system has up to 1000 questions to define what you may be “entitled to”, 5 years ago and probably still theirs only had one).

Posted by Houghtie | Report as abusive

The world will end with a wimper, not a bang. Expect a slow burn as without any bubbles right now, there can be no big drop. Just everyone getting a little bit poorer year after year with the fed keeping industries from totally going bust.

Posted by don | Report as abusive

the article is well thought of;moreover,the whole problem relies on the concept of the current “modern” capitilasm, where it emphisis on predictions/gamble and ignores fundemantils and real output.
futhermore, i agree with jeannick’s particular point where he states the “The Atlantic west has de-industrialized itself and has now no motor for creating real value growth” and that basicaly proves my point that the recovery if accurruing would be fragile and would take a long time because of the “NO REAL Economy state”.

in summary, i think 2010 will witness the blast of the chiness bubble(because of the mismatch of low demand from the west to the high expectation of china for high demand) and it would be signifcant but less sever for the west.
all in all, we need to revive real diversified ethical econonmies and not just betting on capital markets.

Posted by AL | Report as abusive

Capitalism needs bubbles to survive, doesn’t it?

Posted by Ron | Report as abusive

Dear Laurence: Incredibly good article with predictions that will most likely become prescient. U.S. and U.K. along with many other countries led by Keynesian over-spenders are seriously headed for another iceberg. There is now an enormous national debt which we’re increasing too quickly. And job-growth by producing GOODS, not services, is out of the question, for so many reasons, not the least of which is crushing taxation and health-care mandates to hire new employees and ‘in-source’ production. Obama’s health-care monster will be one more nail in the coffin for job-creation. We need to reduce the pay of all govt employees, reduce their benefits and reduce taxation and over-spending by all levels of govt. But it won’t happen with the current legislators, unfortunately, and too many voters are clueless.

Posted by steve b | Report as abusive

If the flood of newly-printed money is not absorbed by higher goods prices, there is only one alternative. himmm Chuckle conceptional choice of one. In case you overlook it I wish to draw your attention to a fact that Governments LOVE money. AND are well practiced at Getting hold of it and Forcible prising it off us underemployed peasants and miserable sinners. To suggest that the problem is the lack of ability and will of any Government to take it back is Laughable and Nonsense in the face of the History of money slavery systems and fractional banking. The sheer pleasure of the Fox and his misery Lafter index for the cooped up chickens is finger licking tasty and never far from lip service of the rapacious authorised entities. No effort is spared in dreaming up legal fictions and new laws to part us with our store of wealth. Obviously a Poll tax or permission to breath carbon dioxide Tax ( for our own good and that of the Planet ) of coarse is the Nirvana dream of all Governments.

Posted by Eden and Apple | Report as abusive

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Posted by uberVU – social comments | Report as abusive

The story has only one ending.

Read Andrew Dickson White’s 1979 article in Harper’s Magazine, “The Debtor Class”, on France’s experiment with paper money 1792-1796.

Posted by Fazsha | Report as abusive