Thursday, 29 September 2016

Gramps'll fix it

Mark Carney, Governor of the Bank of England, told us last week that he's out of tools to sort the economy out, yet it's unlikely anyone in the City even so much as glanced up at their screens to see what the markets thought of that. In September 2011 the attack on the World Trade Centre sent the FTSE 'tumbling' by 5% or so but these days City boys eat 5% of FTSE 100 as a side order with their eggs for breakfast.

Another headline last week suggested that central banks have lost the plot and, frankly, I didn't have the heart to read the whole story.  I speculated as I quickly moved on that the headline wasn't intended to suggest that it's the central banks that have no idea where they are on the script but, more likely than not, it would suggest that the script itself got thrown out the window some time back, that they've been winging it for as long as they could get away with it and that it's only now really starting to unravel. It's like the old rules just don't apply anymore.  

Volatility is now the only certainty. As I've suggested above, markets have grown increasingly numb to what were the traditional sources of stimulus during an average day on the trading floor. Market events that would have been considered seismic as recently as ten years ago are taken in the markets' stride, not just because they're priced in but, hey ho, tomorrow's another day and it'll probably be moving the other way in the morning.

What exactly has happened over the last ten years to leave central banks powerless to put the global economy back on an even keel? How is it that despite massive money printing initiatives, record low interest rates which are teetering on the brink of going negative, consistently low oil prices and a crowded online sales environment driving competition up, prices down and high street retailers out of business, that consumer spending isn't pulling the global economy out of the doldrums at pace? The weak pound is also supposedly driving a British manufacturing boom and, notwithstanding the good news, the OECD is forecasting a relatively pedestrian 2% growth in the British economy in the short term but 1%(!) in the medium term as the effects of Brexit set in.

Not only is the economic performance tentative at best, but it's built on rather shaky foundations. Any mention of an interest rate hike sets the markets panicking and the Bank of England has thus far been unable to seriously consider raising rates even slightly. For most of 2015, the rate setting committee at least had one dissenting view that was of the opinion that the time had come to wean the economy off life support. But no. Nine years of transfusions and the patient is only just about alive - there's a pulse, but it's certainly not thriving. 

All the central banks have left is the idea of negative rates and the concept of 'helicopter cash', which is thankfully not yet part of the regular business column vernacular. That might be because it just sounds too much like the US Housing Market/Subprime Crash 2.0 in the making! Even if  from a purely academic point of view it seems like the only logical step forward along this path, I fear that we're only tempting fate if what we're doing is giving the 'children their pocket money' and 'telling them to spend it all at once.'

Is there a salutary lesson in the story of Japan's economic decline? A country which had historically saved more than it borrowed, it had been the doyen of financial prudence and stability, it's people got a taste of the easy money and as soon as the balance swung in the direction of net higher borrowing, the decline set in. Now the Japanese central bank is taking whatever measures it can to basically decimate its currency but it's still doggedly holding on to its value. It's a similar theme that applies to Greece: bailout after bailout was effectively forced upon Greece when anyone and everyone knew that the fundamentals of their economy were such that they couldn't even afford to repay the first tranche of debt. But never mind, as in the glory days pre-subprime, it didn't matter.  You got free money regardless of circumstances.

It is a tough prospect, that of letting a terminal patient go. Unfortunately however, it is often just a matter of biting the bullet and choosing to precipitate something that was inevitable in any event. Whatever the world does to encourage spending and drive growth I fear that, somewhere along the line, we simply forgot the lessons of fiscal prudence born out of necessity, that our parents and grandparents lived by. "Spend within your means - if you don't have the money to buy it, don't." It may be overly simplistic to pretend that the woes of the world can be explained away in these terms but it may be time for us to take a long, hard look at the 'buy now, pay later' approach to life. Question is: does anyone actually want to?