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’