What does the market slump of the past couple of days show?
When the market prices in favourable government intervention (endless free cash), and the government doesn’t meet expectations the easy-credit junkies slouch into a stupor, suffering harsh withdrawal symptoms.
Goldman Sachs Asset Management Chairman Jim O’Neill said the global financial system risks repeating the crisis of 2008 if Europe’s debt crisis escalates and spreads to the U.S. banking industry.
“This is where the parallels with 2008 are relevant, even though I think they are being over exaggerated,” O’Neill said in an interview on CNBC today. “It was when the financial system really imploded that financial firms stopped extending credit to anybody that the corporate world had to destock and we know what happened after that. We are not far off the same sort of thing.”
More than $3.4 trillion has been erased from equity values this week, driving global stocks into a bear market, as the Federal Reserve’s new stimulus and a pledge by Group of 20 nations fails to ease concern the global economy is on the brink of another recession. O’Neill said the Fed’s plan to shift $400 billion of short-term debt into longer term Treasuries hasn’t convinced investors it will strengthen growth.
“The fear that it’s all dependent on the Fed, together with this mess in Europe, is really getting people more and more worried as this week comes to an end,” O’Neill said. “The markets have taken the latest FOMC move rather badly, which adds a whole new angle to it. It’s the first time since the global rally started in early 2009 that the markets have rejected a Fed easing.”
“As the problem in Europe spreads from Greece to more and more other countries and in particular Italy, the exposure that so many people bank-wise have to Italian debt means the systems can’t cope easily with that and it would spread way beyond Europe’s borders,” O’Neill said. “This is why the policy makers need to stop being so sleepy and get on and lead.”
Yes — of course — what the market junkies need is another hit, another tsunami of easy liquidity, money printing and endless “bold action”. Otherwise, the junkies would be left shivering in a corner, cold turkey.
John Maynard Keynes’ view was that government needed to act quickly and decisively to stabilise markets, because although markets would in the long run naturally resolve their problems, in the long run we are all dead.
But governments acted swiftly and decisively in 2008, and throughout 2009 and 2010 channelling trillions of dollars into markets. And even that hasn’t been enough to sustain the junkies. So asset prices are tanking.
This is because — as I have noted ever since I started writing this blog — pumping the markets up with cheap easy credit is actually preventing the underlying problems from being resolved. These include excessive public and private debt, Western reliance on Arab oil and Chinese goods, zombification of the banking system, excessive military spending, stagnation of the labour market, etc.
Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, the derivatives-industrial complex, food and fuel inflation and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…
Until we address the underlying problems, the market — in the long run — will keep crashing. And in the long run, we’re all dead. So that’s twice as bad. Junkiefication leads to junkification.