The soccer fans of West Ham United have sung the song ‘I’m
forever blowing bubbles’ since God was a boy (or least since the mid 1920s) and
whatever relevance it may have to inspiring sportsman has been lost in the mists of time. The chorus of this American ballad
goes;
I'm forever
blowing bubbles,
Pretty
bubbles in the air,
They fly so
high,
Nearly reach
the sky,
Then like my
dreams,
They fade
and die.
Fortune's
always hiding,
I've looked
everywhere,
I'm forever
blowing bubbles,
Pretty
bubbles in the air.
As with sports so with finance, the economic cycle is an
endless treadmill of precarious bubbles
that ‘fade and die’. The simple truth is that markets (people) are lazy, we are programmed to take the easy option, that’s evolution for
you. And this rubs off in the world of
finance, we almost always lurch from one soft option to the next; in the last
15 years we have had the dotcom boom, the alchemy of algorithmic trading, the
credit bubble and the addictive pleasures of QE. In the
good old days we had central bankers who would from time to time burst the
bubble and insist that we get back to the serious business of controlling inflation
and nurturing sustainable growth. With
deflationary pressure all around the Fed have been busy blowing bubbles not
bursting them, but this is about to change.
In the last week the markets for both bonds and equities
have been in full scale retreat, frightened by the smoke signals coming out of
the Fed, which is pouring $85bn of new money into the US economy every month. QE has had the effect of lowering interest
rates and presumably nurturing some growth and new jobs. All this has been achieved without stoking
the fires of inflation but this can’t go on forever; in the short run negative
real interest rates have a positive impact in the longer run (just ask the
Japanese) worthless money kills ambition and productivity. It is therefore
somewhat worrying that our Central bankers are now so cautious on the need to
wind back QE and return to real money. Probably
more worrying is the fact that these self-same central bankers now believe that
they should have a remit for ensuring high levels of employment and positive rates
of growth rather than just managing the money supply and inflation. News that the Fed will use QE until
employment rates rise to 92.5% and to be in a world where employment should be
the sole arbiter of interest rates and money supply is a madness of schizophrenic
proportions. Have we have forgotten all
the important lessons of the of the 80s and 90s when we had raging inflation,
high interest rates and low employment? The world’s central bankers need to get back to their day jobs of
managing inflation, otherwise more pretty bubbles will fade and die!
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