This is an excellent article from the Economist and a strongly recommended read. Check it out!
Personally, after reading the article I have three major observations.
Firstly, it is worrying how dependent the stock market rise is upon quantitative easing (QE), monetary policy from central banks, rather than say corporate profitability or consumer growth. Once again, this is evidence that the other lever of economic management, namely fiscal policy is missing. For me, this is a further signal that governments must ease up on short-term austerity to avoid an asset bubble and another financial crisis.
Secondly, whilst quantitative easing (QE), monetary policy has been used effectively in the US, the UK and most recently Japan, this important lever of economic management has not been deployed in Europe. Individual countries in the Eurozone no longer have a central banking policy option and are dependent upon the decisions of the ECB (European Central Bank). The ECB has so far refused to endorse more radical monetary policy because of limitations in its authority. In my mind, the ECB is still not a real central bank, and Europe is suffering unnecessarily. The ECB is also constrained by Germany where the German Government and the German central bank are hostile towards looser monetary policy. Of course, in Germany policy-makers are always fearful of action from the Constitutional Court which is supposed to be the guardian of ordinary people’s interests. Matters are also not helped by cautious decision-making by the German government ahead of the German election in September.
Thirdly, the stock market boom is making wealthy people wealthier and ordinary people continue to suffer. Ordinary people’s savings are probably earning a negative real return from bank interest; if inflation returns, they will suffer a serious real loss, like in the seventies. Annuity rates are at a record low, so those approaching retirement are facing lower income in retirement. Those ordinary people who are tempted into riskier investments like units trusts etc., will probably see real returns eroded by high charges from financial institutions. Meanwhile, the unemployed and particularly youth unemployed are likely to get increasingly angry that the game is stacked against them; this could well lead to serious civil unrest this Summer, in my view.
My personal conclusion is that the US, the UK and Germany must reflate and abandon austerity. We are overdue for a strong dose of Keynesian medicine, like for example a large expansion in both public sector and private sector capital spending – for an excellent example look to China in 2008.
What do you think?
Do you agree or disagree?