So what, really, is going on?
Well it seems that most of the world’s
central banks – led by the Federal Reserve in the US-- have decided that it is
their duty to ensure that no one, however reckless or stupid should be obliged
to face the reality that many investments go bad. Very roughly speaking the
rather mysterious previous role of the central banks was to be the lender of
last resort to the banks and then to
keep a beady eye on how and to whom they in turn lent that money. Inevitably,
however, from time to time a bank will get into difficulties by, for example,
lending money to someone who forgets to pay it back or allowing the whizz kids
in the trading room to sell cheap and buy expensive instead of the other way
around.
When word of these problems get out, a
queue of depositors, clamouring to withdraw their cash, appears at the front
door of the bank. Politicians get uneasy when they see unhappy voters who these
days have been led to expect that any mishap that befalls them is not their
fault and that the government must protect them. Taxpayer’s money is then
hastily distributed to ensure that all affected parties are comforted and that
no one pays too much for their mistakes. This activity is termed a bail-out, a
phrase frequently applied to keeping leaky boats afloat.
Unsurprisingly the cash collected from
current taxpayers is limited and quickly runs out. So the politicians then instruct
the treasury to borrow the necessary funds and so pass the consequence of their
bad decisions on to taxpayers yet to be born. However, many of the usual
lenders to government have been watching this development with alarm and don’t
share the politician’s determination to prevent the natural processes of
capitalism to cleanse the system of failed and foolish ventures. Normally a
lender’s reluctance can be overcome by offering them higher interest rates on
the loan, but remember that it has been decided that the price of money must be
kept low, even by force if necessary, so that people can afford to borrow
(which is where this all started – I know!).
Now the central banks return to the story.
They have the rather nifty ability to create money with a simple dab at a
keyboard. In a substantial departure from previous practice and policies, central
banks in several significant western economies became buyers of government
bonds in very large amounts. This provided those governments with the money to
live far beyond their means. The
economic model that justifies this is founded on the belief that eventually all
this cash sloshing about will eventually fuel surges in consumption,
production, wealth and taxes. The latter will then be channelled into repayment
of the loans and the globe will spin happily on its usual axis once more. May
that be so and may it happen soon. Sadly so far there are only tiny hints that
any of this is happening.. In the meantime and in preparation for that expected
recovery, investors are paying ever higher prices for shares that others bought
earlier much more cheaply.
Some of us are pretty uneasy about the
glibness and neatness of this scenario but can yet offer no better alternative.
We have plenty of time to think though, now that the Indians refused to play a
third test. The Test program is a mess. It’s time the task of planning was
returned to some old buffer at Lords in an Egg and Tomato striped jacket and
tie.. The present lot of slick operators are too busy fiddling with the air conditioner
buttons and checking that the bookies are on speed dial to get the program
right.
James Greener
3rd January 2014
