Central banks go for bust

The previous one followed the tsunami two years ago. But what is remarkable about the fall in the Nikkei is not its size but the fact that it has been so long in coming.

For a year, financial markets have been in bullish mood even though Europe is in a prolonged double-dip recession, the United States recovery has been poor and China is losing momentum.

After relentlessly turning a blind eye to bad data, markets responded badly that night to rising Japanese bond yields, a weak business survey from China and mixed messages from Washington about the future of quantitative easing.

The reason markets have been rising has, of course, nothing to do with real economic conditions and everything to do with the willingness of central banks to print money. Investors have been able to play in the casino with chips liberally provided by the Federal Reserve, the Bank of England and, more recently, the Bank of Japan. They have been having a fine old time of it. After such a strong rise, a correction has always been inevitable. The question is whether this is a pause for breath, or the start of something more serious.

Almost certainly, it will be a temporary pause, a blip. Central banks may well be inflating the biggest financial bubble the world has ever seen, the popping of which would trigger a second global slump, but they are convinced they know what they are doing.

Extra liquidity, they believe, will feed through into higher business and consumer confidence, and this will put the global economy on a stronger path. They prefer to have the problem of asset prices going through the roof than the problem of deflation. If they are wrong and the bubble bursts before the recovery arrives, it will be the mother of all credit busts.

The central banks are now in a very tricky position. Financial ­markets are so hooked on the electronic money created through quantitative easing that they cannot cope without it. The Fed chairperson, Ben Bernanke, made it clear on Wednesday last week that he wanted the quantitative easing to continue at its current rate.

In the short term, a commitment to keeping the money taps running full on will do the trick. Market corrections will be followed by soothing words and policy easing by central banks, and this will prompt further buying of assets. In the end, of course, this increases the chances of an almighty bust. That indeed looks likely. But not yet. — © Guardian News & Media 2013


South Africa could use a communist party

The SACP is not building socialism, or even social democracy. Sadly, it has become just another party advancing the politics of patronage

OUTvest ‘fires shots’ at the industry

New offering has all the retirement annuity features, but charges rock-bottom fees

Treasury is still seeking SAA funds

The government has committed an additional R2-billion to the airline, but has yet to pay it out

‘There were no marks on his neck’, Neil Aggett inquest...

The trade unionist’s partner at the time he was detained at John Vorster Square says she now believes his death was not a suicide

Press Releases

MiX Telematics enhances in-vehicle video camera solution

The company has launched the gold MiX Vision Bureau Service, which includes driver-coaching tools to ensure risky driver behaviour can be addressed proactively and efficiently.

Boosting safety for cargo and drivers

The use of a telematics system for fleet vehicles has proved to be an important tool in helping to drive down costs and improve efficiency, says MiX Telematics Africa.

Silencing the guns and firearms amnesty

Silencing the guns and firearms amnesty

Gender-based violence is an affront to our humanity

Gender-based violence is an affront to our humanity

UK-Africa investment summit 2020: Think Africa Invest SA

UK-Africa investment summit 2020: Think Africa Invest SA

MTN unveils TikTok bundles

Customised MTN TikTok data bundles are available to all prepaid customers on *136*2#.

Marketers need to reinvent themselves

Marketing is an exciting discipline, offering the perfect fit for individuals who are equally interested in business, human dynamics and strategic thinking. But the...

Upskill yourself to land your dream job in 2020

If you received admission to an IIE Higher Certificate qualification, once you have graduated, you can articulate to an IIE Diploma and then IIE Bachelor's degree at IIE Rosebank College.