"The duration of the slump may be much more prolonged than most people are expecting and much will be changed both in our ideas and in our methods before we emerge. Not, of course, the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase."
- John Maynard Keynes, writing in 1931, and cited by former BoE Monetary Policy Committee member Danny Blanchflower at a recent investment conference.
"The government borrowed £163.4 billion in the past financial year, the worst level of borrowing in Britain's peacetime history.."
- Financial Times article of 22nd April 2010.
Or, as Rogoff and Reinhart put it, financial crises are long-drawn-out affairs and their aftermath, unlike that from a volcanic ash cloud, tends to linger dangerously, for years rather than months. Pimco have made similar observations about the likely medium term impact on the western economies with their ongoing reference to a “new normal” that is likely to display distinctly sub- par growth and the dead hand of increased government intervention. Facing significant but as yet intangible crisis, human nature is not helpful. We can only stand so much grief, and then sunny optimism kicks in, whatever the objective reality. Another problem is the mob-like status of modern communications. The Internet has given a voice to millions with nothing to say. Finding meaningful and relevant (investible) signals within the relentless barrage of cretinous noise is an ever-growing challenge.
This would seem to be the case as regards the building sovereign debt crisis, something to which the IMF refers, in its deceptively bland way, when it describes how economic activity is “subject to downside risks, as fiscal fragilities have come to the fore”. Translated into usable English, this probably equates to “the economy could easily contract since most governments are bankrupt”. And some more bankrupt than others. The human tendency to be glass-half-fullish is most obvious in relation to Greek debt markets, oscillating as they have been between periods of temporary if baffling calm (new emergency funds will expand, not ameliorate, the country?s current indebtedness) and nightmarish volatility.
In most walks of life there is a part to be played by optimism. Not so in matters of finance. This has not stopped the usual interest groups from denying reality amidst the Greek crisis. “We must…
