Stock markets rallied yesterday and reached new highs in the current one year old rally, based on moderate rises in commodities like oil, gold and copper. Financial stocks too took a lift from the Fed’s promise to keep interest rates down at 0.25%. The whole of the world’s main stockmarkets are now being held up on a saline drip of effectively free money, being supplied in unlimited quantity to organisations that keep bidding up asset prices.
They have to do this, as if these asset markets were to fall, their previous positions would turn from profit to loss, and the true picture of how little substance there is in current stock market levels would become apparent. This is an entirely new phenomenon. It used to be confidence and hope that drove stock prices upwards, but in this current debt-fuelled topsy turvy world, it is now raw fear that drives up prices instead. They have to keep buying, or face reality. And the government and the Fed, fearful of the consequences of limiting the flow, are for now, keeping the taps open.
While the Fed and other Central Banks do so, they also realise that this game of feeding another asset price bubble cannot go on forever. Other branches of government, including the European and the American financial regulators are talking sincerely of finally closing the door on the casino with limitless chips on loan, by demanding higher capital down-payments and making rules that unless a player has real world interests in the markets they wish to trade, they cannot buy and sell futures and other derivative FPs within them.
This will overnight take power away from the hedge funds and give it back to industrialists, growers and miners. The real world will finally be put back in control of the internet-based financial casino, that is currently controlling the world, and which has run away with itself.
When this happens, the commodity markets will be, for a while, shredded, and share prices will be tipped into a downwave. If this doesn’t happen, however, the world will later on face the meltdown of its economic system, as the bubble will be beyond all control.
Even now, the dangers of bringing the bubble back down to earth are great, and potentially very serious, if for example China and America don’t form a more cooperative relationship. But if the world allows another bubble to grow as the only response we have to the current financial mess we are all in, the consequences will be the collapse of the world’s trading systems. Lehman Brothers times 100.
Meanwhile, knowing this truth, fear drives prices on up in asset markets, just as in time it will inevitably drive them down again – maybe a lot faster. But from a basis of reality, not internet-driven financial fantasy, we can at last get back to normality. The shake-out, however, will be like Greece times 100. There seems no way to avoid it.
Britain’s position in all this is pitiful. If we had carried on as we were in 1997-1999, with spending under control, we would be well placed. But after thirteen years of Gordon Brown we face a disastrous period. The casino in London will be closed. Government will be cut in half. Onerous regulations that stop people from doing anything to help themselves will be removed, and life will eventually get back to normal. But it will take years of struggle.
If Brown wins the election, heaven help us. Zimbabwe will seem like a paradise compared to the ruin we will face.