There are huge quantities of oil in store and afloat. Russia is pumping more as OPEC tries to throttle back production. Western and Eastern demand has been hit by the collapse of manufacturing output.Yet the oil price climbs and climbs, now almost double the low point reached earlier this year. There is plenty of investment or speculative demand.
Banks are still struggling to deal with all the past excesses in their lending books. More of the mortgages and corporate loans they advanced have been brought into question by mounting job losses and corporate profits declines. Bank shares have risen sharply from their lows.
The most violent phase of the de stocking may be over, but there is not yet any sign of output rising again. Confidence for the future is higher, but many businesses are still finding it tough to gain the custom they need.
All this could just be that phase of a normal cycle where financial markets move ahead of the real economy. The real economy will follow later, as the extra money percolates through from the purchase of financial assets into economic activity more generally.
There remain more than a couple of worries. Quantitative easing is an extreme reaction to extreme conditions. All the time the authorities are creating more money, it can sustain higher asset prices. When they stop it might look rather different. The extent of the borrowing needs of both the US and UK governments tower over markets. Despite quantitative easing, government bond prices are not roaring ahead. Investors are nervous of their future prospects, and aware that there will be no shortage in the months ahead. When QE stops, it will be much more of a strain on all markets as investors struggle to come up with all the money big brrowing governments seek.
The imbalances of the main economies have to be corrected. Lower sterling – and now a devaluing dollar – will help cut the balance of payments deficits. Only reducing governemnt spending, preferably by improving government efficiency and productivity, can tackle the major imbalance of some Western economies trying to borrow far too much. Extra government borrowing is not the answer to recession, but at the crux of the problem that needs sorting out between the high borrowing and the high saving countries.