Now investors have woken up to the fact that the euro was a myth, they have also realised that for ten years governments have been quietly coaxing growth out of their tired economies by running up deficits. The Greek debt crisis has laid bare how important euro strength has been in perpetuating this system, so much so that the euro's very existence is now in doubt. We have been harping in this column for years on how a currency with no common budget policy or finances to back it up is a mirage. It is up to the EU governments and Brussels to get this into their heads, and fast, if they do not want to see their dream of unity unravel.
Present economic conditions and monetary policies have never been described in textbooks on the subject or by historians. The US Federal Reserve blazed the trail by buying bonds and mortgage-backed securities to keep the cost of borrowing from going up. In other words they are monetising debt to beat the band, and this is skewing interest rates to the point where no one knows where they really should be. True, a sharp tightening of credit conditions would rack the financial and real estate industries. But zero rates are almost certain to feed speculation and bubbles. Whether or not hyperinflation will result is an open question, and that is one reason why gold has rocketed.
Even the party-pooping European Central Bank has joined in. Jean-Claude Trichet, who not so long ago was fretting about inflation, has committed his institution to snapping up European sovereign debt in a bid to smooth out the rough terrain in credit spreads. The ECB is also eager to provide a liquid market for the bonds of the weakest Euroland members, caught between income-hungry investors fearful of default and hedge funds trying to capitalise on a worsening situation. How far can this business go while still looking halfway credible? Nobody knows because we have never been there. Like now.
The second problem that needs solving is how to reconcile financial income and income from work. With no growth and no purchasing power the industrialised economies are poised to stagnate at best. The offshoring engendered by globalisation has reached its limits and is now bordering on the irrational. If companies do not pay any more taxes and if consumption is choked off by the hikes in social security contributions needed to fill the vacuum, then something is bound to snap in the capital-labour relationship. The social consequences will be disastrous. The major trading partners have to agree on a minimum rate of corporate tax to prevent destructive imbalances. The extent of existing distortions was pointed up by the Zug-based(!) drilling contractor Transocean's IPO. After President Obama stopped US corporations from using the Bermudas as a tax haven, they moved to Switzerland and, in particular, to the cantons that come out on top in international fiscal competition. Enter Transocean in the SMI, exit Swiss Life. Forget the unspeakable oil spill in the Gulf of Mexico! What would Switzerland's blue-chip index be like if it contained a large number of offshore companies (no pun intended)? A circus—financial exaggeration gone utterly berserk!
Pensions are another issue that has to be addressed soon. Should senior citizens be entitled to comfortable retirement incomes indexed to inflation when young people are unemployed and the ratio of pensioners to workers keeps growing? Who will pay for longer life expectancy, especially when the going gets rough economically? Obviously the problem is politically charged and can only be solved over time. Three-quarters of the customers of hotels, tour operators and cruise companies are seniors. While they are out having fun, will workers have to put in longer hours to foot the bill? I would not count on the life expectancy of that!
The huge mass of production and GDP that has been offshored to sweatshops in China and the rest of Asia has resulted in the transfer of financial resources to these same countries, which are now financing the industrialised world's deficits. The day their savings stay at home to be invested and consumed locally, the standard of living in the erstwhile developed countries will drop drastically. We are probably witnessing the start of this process. Global income is about to be redistributed on a grand scale. The benefits of globalisation may already be reversing for those who have profited most from the process in the past 20 years.
The markets could turn up a bit in the coming weeks, finding a new balance after the May sell-off. But the prevailing mood will remain glum with so many thorny issues to untangle, so much lost confidence to restore and so many, varying risks of things going wrong. The dollar, which leading economists were predicting six months ago would lose its reserve currency status, will likely fall back to correct its surprise upside overreaction. All four major currencies are sick, and the race to gain a competitive advantage by devaluing them continues. Not one of them holds more appeal than the others, another reason why gold keeps climbing. The mood is glum, glum, glum...
P.S. Accenture shares closed at one cent the evening the computers on Wall Street ran amok. Goldman Sachs's revenues averaged $35 million a day in the first quarter, without a single day in the red.
China is investing massively in Greece.
Everyone is hunched over his ipod, iphone or ipad.
Société Générale is counting on its trading room to help double profits in two years. Bring back Kerviel!
No, nothing has changed. Even in uncharted territory it all looks pretty familiar.