Monday, March 05, 2007


Excuse me, but are you watching this? Okay, so the Federal Reserve are insisting that the global economy remains strong (or, to put it in the much-mocked phrase, "the fundamentals are sound"). And it is suggested in some quarters that the stimulus for these terrifying falls in global markets has actually been a sequence of false and alarmist information, beginning with rumours of austerity measures about to be introduces in China. Others are saying that it's merely a correction, taking the stock markets to a realistic base.

Larry Elliot, one of the few remaining left-Keynesian economists to get a voice in the mainstream press, has a different take. The Bush administration, he notes, has every reason to play down the threat of a recession. The measures used by past US administrations to ward off or attenuate recessionary pressures have included big interest rate cuts to provide cheap money. That may not have much purchase this time because:

For one thing, the two debt-driven bubbles have left consumers enormously over-extended. For another, inflation in the asset markets has spilled over into general inflation. Cutting the cost of borrowing might have more of an impact on prices than it would on activity.

Consumer spending has held up surprisingly well given the collapse in the housing market, but that too is running out of traction, and:

Given Asia's export-dominated growth is heavily weighted towards the US, investors should be prepared for the 9% fall in Shanghai last Tuesday to be the first of many bad days.

However, citing 'optimistic' assessments from an HSBC economist, Elliot notes the possibility of a global 'decoupling' in which a US recession might be isolated. That may be, and if so it could push the American government to various extremities in order to conserve its global supremacy. The UK, however, has much of its foreign direct investment in the US, and most of its stock market is owned by the US. The most recent announcement of UK profit rates suggest that the economy has been quite strong since 2000, is based on a thriving service economy and a weak manufacturing base. How well will that service economy hold up if overseas investments yield weak returns, if the housing market crashes as it is bound to do, if the massively overvalued stock markets cave in?