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The Spectator: Are we on the verge of a new credit crunch?

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There’s no shortage of commentators (and stockbrokers) insisting the outlook is rosy and share prices will keep on rising. And almost all political punditry assumes the UK economy is improving fast and, as next May’s general election approaches, will get better still.

 

Yet alarming evidence is amassing that the global recovery is shaky, stock markets are over-hyped and the large western banks, for all the talk of reform, remain a serious liability. The reality, and it gives me no pleasure to write this, is that we could see a re-run of the ghastly credit crunch of 2007/08.

 

America, still the world’s largest economy by far, contracted sharply during the first quarter of this year. US GDP fell at an annual rate of 2.9 per cent on official figures, the first drop we’ve seen since the dark days of 2011. The eurozone, meanwhile, remains on the brink of recession, with GDP across the 18-nation currency area expanding a mere 0.2 per cent.

 

Despite this lack of growth, stock indices in the US and across the western world have repeatedly hit all-time highs in recent months. No matter that GDP is contracting or that US first-quarter corporate earnings were down 3.4 per cent. America’s S&P500, the world’s most watched stock index, has broken its daily closing price record more than 20 times this year.

 

The reason, of course, is the Federal Reserve’s money-printing machine. Since ‘quantitative easing’ began in response to the late-2008 collapse of Lehman Brothers, the Fed has created thousands of billions of virtual dollars, with the Bank of England chipping in hundreds of billions of similarly computer-generated pounds. Much of this has found its way into global stock markets, sending equity prices sky-high. Designed as an emergency measure, QE has since become a lifestyle choice, the financial and political equivalent of crack cocaine.

 

While the Fed has begun ‘tapering’, slowing down the rate of its de facto money–printing, the scale of QE remains vast, some $45 billion a month. That’s driven the absurd ‘bad news is good news’ mantra that still dominates the thinking of investors on Wall Street and other major stock markets. Weak economic numbers make it more likely the Fed will relent and slow down or even reverse its tapering, turning up the funny–money dial, and thus stock prices, even more. Forget economic growth and forget corporate earnings. It’s all about the Fed.

 

This blatant rigging of western equity markets has gone on for several years, with stocks soaring despite weak economic fundamentals. While everyone in financial circles knows this, to say as much out loud is to guarantee pariah status — and I should know. But eyebrows are now being publicly raised by genuine insiders, with the Swiss-based Bank for International Settlements, an umbrella organisation for the world’s leading central banks, warning of ‘euphoric’ equity valuations. ‘It is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,’ it argued in its annual report published earlier this month.

 

 

http://www.spectator.co.uk/features/9271191/back-to-the-brink/

 

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