Satyajit Das: The financial markets still bear little relationship to the real economy
Das Capital: Politicians everywhere have proved reluctant to tackle much-needed reforms
Satyajit Das writes the Das Capital Column in the Independent. He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant to banks, fund managers, governments, companies and regulators around the world. He is also the author of Traders Guns and Money and Extreme Money as well as a number of reference books on derivatives and risk-management, which double as 'door stops'. He became a banker because he wasn't good enough to be a professional cricketer, but would give up finance if anyone offered him a job as a cricket commentator or allowed him to pursue his other passion- wildlife (he is the co-author with Jade Novakovic of In Search of The Pangolin: The Accidental Eco-Tourist). He lives in Sydney, Australia.
Tuesday 07 January 2014
Equity markets are making new highs almost daily. Even the Nasdaq has risen to levels not seen since the tech bubble, as technology stocks are back in fashion and investors look for the next Google, Facebook or Twitter. There is even a bubble of analysts arguing that there is no bubble!
Such is the environment that a reader of the Financial Times commented that even an imminent alien invasion would result in rising equity prices as analysts would argue that companies could look forward to gaining new non-human customers.
Investors assume that the global financial crisis is ancient history and normality has returned. But puzzlingly, while financial markets are buoyant, the real economy remains moribund, stuck in a “secular stagnation” of low, volatile growth, high and rising debt levels, slow investment, overcapacity, high unemployment, low income growth and negative real interest rates.
Despite the talk of recovery and reforms, little has actually changed.
The crisis was the result of high debt levels, global imbalances, excessive financialisation of economies, and an entitlement society based on borrowing-driven consumption and unfunded social programmes in developed countries. These root causes remain substantially unaddressed.
Since 2007, total debt levels in most economies have increased rather than falling. Higher public borrowing has offset debt reductions by businesses and households. If unfunded obligations for pensions, healthcare and aged care are included, the level of indebtedness has increased dramatically.
Most importantly, in trying to boost economic activity following the 2008-09 downturn, emerging markets such as China have increased debt levels substantially.
Global imbalances have narrowed but only modestly, and reflect lower levels of economic activity with a sharp reduction in imports in many developed countries, rather than a fundamental rebalancing. Large exporters such as Germany, Japan and China remain committed to economic models reliant on exports and large current account surpluses. Increasingly, nations have turned to manipulation of their currencies to stay competitive.
In the period leading up to the crisis, excessive financialisation manifested itself as the rapid growth of the financial sector, increasing trading volumes of financial instruments, and a focus on financial activity at the expense of the real economy.
The size of the banking sector in developed countries has not decreased materially. “Too big to fail” banks have become larger. Trading volumes remain high, well above that needed to support the trading of real goods and services.
There are still bigger profits to be made by trading in financial claims over real economic activity than engaging in the real economy itself, continuing to support a disproportionate level of financial rather than real business activity. Governments and central banks exacerbate this trend with their low rates and abundant liquidity.
The complex links and interactions within the financial system that helped to so efficiently transmit the shock waves during the crisis remain. Complex capital, liquidity and trading controls introduced in response to the crisis have not addressed the underlying problems.
The links between nations and the big banks have increased dramatically, with a sharp increase in risk. Sovereigns needing to find buyers to finance their spending have encouraged banks to take on growing amounts of government bonds.
Meanwhile politicians everywhere have proved reluctant to tackle much-needed reforms of social welfare spending.
In December 2012, the German Chancellor Angela Merkel pointed out that “Europe has 7 per cent of the world’s population … but is financing 50 per cent of global social spending”. But a year later, as part of the coalition deal with the SPD, Ms Merkel agreed to a new minimum wage and more generous retirement benefits, including a reduction in the retirement age from 67 to 63 for some workers.
The poet T.S. Eliot observed that humans “cannot bear very much reality”. Suffering crisis fatigue, policy makers and citizens have chosen to largely ignore the problems, choosing instead to accentuate positive data in the hope that the good times will return. Another reader of a newspaper posed the right question: “Never mind the glass half full or empty argument. Who’s plugging the hole in the glass?”
Satyajit Das is a former banker and the author of ‘Extreme Money’ and ‘Traders Guns & Money’
Is your name now 'banned' in Saudi Arabia?
Exclusive: World’s most pristine waters are polluted by US Navy human waste
Missing Malaysia Airlines Flight MH370: Any terrorist seizure of the plane ‘would have required one hell of a piece of planning’
Croatia's second city to close 'worst zoo in the world' after reports of 'nightmare' conditions and 'depressed' animals
Missing Malaysia Airlines Flight MH370 Q&A by Simon Calder: How far could it have travelled? Who was responsible and what would their plans be? And how can a plane just vanish?
Katie Hopkins continues campaign to become Britain's most hated talking head with poorly timed Bob Crow tweet
No EU referendum under Labour: Ed Miliband to reveal that vote on membership is ‘unlikely’ in next Parliament if party wins power
Tony Benn was entirely ineffectual - and usually wrong
Ukip and Nigel Farage on course for remarkable victory in European elections
Grace Dent: Who cares if she spells it Barraco Barner? Gemma Worrall is more employable than some bookish arts graduate
The rise of Ukip: Study warns Labour that Eurosceptic party's electoral base now 'more working class than any of the main parties'
- 1 Is your name now 'banned' in Saudi Arabia?
- 2 Exclusive: World’s most pristine waters are polluted by US Navy human waste
- 3 Gender-specific books demean all our children. So the Independent on Sunday will no longer review anything marketed to exclude either sex
- 4 Missing Malaysia Airlines Flight MH370 Q&A by Simon Calder: How far could it have travelled? Who was responsible and what would their plans be? And how can a plane just vanish?
- 5 'Missing Malaysia Airlines Flight MH370 plane found in Bermuda Triangle!' Viral Facebook links are profiting hackers
iJobs Money & Business
£35000 - £43000 per annum + Bonus and Benefits: Harrington Starr: A global lea...
£50000 - £60000 per annum: Harrington Starr: Linux Systems Administrator - UNI...
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£37000 - £40000 per annum + £20000 benefits package: Pro-Recruitment Group: **...