The great British economist John Maynard Keynes once said that cutting interest rates in a slump was like pushing on a piece of string—in other words, it had no effect. This morning political leaders on both sides of the Atlantic must be worried that the same could be said for ALL their policy responses to the banking crisis.
In London, Washington, Paris, Berlin and Brussels they've recapitalized the banks, guaranteed inter-bank lending, cut rates and ensured the financial markets were awash with liquidity—yet still banks won't lend to each other (never mind you or me) and stock markets remain in freefall.
Everybody (bar government officials and politicians in public) is assuming that the bank rescue plans have come too late to stave off a serious global recession—and that's what's prompting further massive falls in the world's stock markets.
The only "good" news is the collapse in oil and food prices. Indeed all industrial commodities are on the slide—but is that really "good" news? When commodities collapse it is proof positive we're heading for a serious recession. Nobody will escape.
Yesterday the Dow Jones suffered its second biggest drop in a single day, down almost 8%; in Japan, the total value of the country's top companies plummeted by nearly 10% overnight, a truly astounding fall; this morning the London stock exchange continues to plummet.
This morning the BBC’s business editor likened it to “an avalanche—a snowball of tumbling share prices [which] began in Europe yesterday afternoon, picked up momentum on Wall Street—where the important S&P 500 index suffered its biggest loss in 21 years—and has been battering Asia overnight.”
World leaders, in unprecedented co-operation and synchronicity, have thrown almost $4 trillion at the problem and still the stock markets fall. Even worse, the banks won’t lend to each other and the inter-bank lending rate for three months remains stubbornly high. So last week’s interest rate cuts are not being passed on to businesses or individuals. And, as we ponder why the bank bailout isn’t working (is it just a matter of time, or worse than that?), another worry looms ever larger: global economic recession.
The latest economic statistics on both sides of the Atlantic are unanimously grim: British inflation and unemployment are worse than they've been since the early 1990s and American retail sales are down 1.2%, the biggest fall in three years.
The US Federal Reserve’s beige book, a key survey of upcoming economic conditions, reveals pervasive weakness across the US, with tight credit, deteriorating consumer spending and a weak labor market.
Even emerging economies, including China, are starting to look fragile. Chinese demand for commodities such as iron ore is falling, causing major mining stocks like Rio Tinto to slide. Shipping rates are falling fast. So much for so called "decoupling" theories that they could carry on regardless, even as the West went to hell in a handcart. Always nonsense, now seen to be so.
The only "good" news is the collapse in oil and food prices. Indeed all industrial commodities are on the slide—but is that really "good" news? When commodities collapse it is proof positive we're heading for a serious recession.
Nobody will escape, not even mega-rich hedge funds. Investors pulled $43 billion from US hedge funds last month; JP Morgan says outflows will total $150 billion in coming months and some think the industry could shrink by 50%. Some fund managers, struggling to avoid huge withdrawals at year-end, are even offering to suspend fees if investors keep their money in the funds until March. Clearly we are in a new world.