Recent days have seen a big sell off in world equity markets.
Markets are never wrong, but they can change their mind tomorrow. Like daily elections, they represent the combined wisdom of everyone involved. We trawl through them , trying to interpret them, because they are the best indicator we have of what people think will happen next, and what might happen next.
If you look at what forecasters and many individuals say will happen, there is no great need to worry. The official wisdom says the US economy will continue to recover, the Chinese and Indian economies will grow rapidly, and even the larger European countries will edge forward. No-one expects a run on a major bank or a repeat of the severe financial dislocation of 2008. Expensive property in London keeps attracting rich buyers, fine wines and precious metals reach new giddy prices and company profits look much better than at the bottom of the recession.
So why is there so much worry? It is true the Euro crisis is far from helpful. Countries which are not sovereign should not issue so much “sovereign” debt, as they can’t print the money to pay it back. It is true the Chinese authorities have been squeezing their banks to try to control inflation, and the rest of the world now feels the wash back from their actions. Some recent US figures have implied slowing, with some fearing double dip.
I suspect the main problem that underlies it all is the continuing perversity of the major countries in their approach to bank regulation. At the very time when they say they want a recovery, and when they forecast one, they are still demanding ever higher levels of cash and capital from the banks under their control. As a result, money growth is still too low in the West to pay for a decent recovery. You always notcie a shortgae of money first in the financial markets. If these governments truly want a decent recovery they should mend their ways in their approach to the banks. They may not love the banks, but they need them to spread some more money around to finance higher growth.
Sterling continues upwards against the dollar, as markets feel more reassured about the trend of the UK deficit.