Outlook: It's crunch time for liquidity
Wednesday 02 September 1998
The truth of the matter is, however, that we are not yet in a recession, nor, on the balance of probability, does it appear likely there is going to be one, either in Europe or the US. Recession is defined as two successive quarters of negative growth, and hardly anyone is predicting that for Europe and the US, even after the traumas of the last month.
That does not mean it won't happen, or that things aren't going to be anything but extremely tough over the next few years. Right now events are alarming enough to suggest a number of very ugly outcomes, each of them capable of tipping the world into outright recession.
The most compelling of these is the possibility that the bear market we are now witnessing on Wall Street will turn into something similar to the Tokyo rout of the early 1990s. Japan is the nightmare precedent for what happens when a big asset price bubble bursts. Don't try and call the bottom, just sell into the rallies and stick your money in bonds, is the doomsday lesson of the Tokyo collapse.
The parallels with Wall Street are uncanny. Like Japan, valuations were driven sky high by the belief that the US had discovered economic nirvana, that strong, low-inflation growth could go on for ever. Like Japan, the bull market in equities has itself helped sustain US economic growth by making Americans feel richer and thereby encouraging them to spend more. In Japan in the late 1980s companies thought themselves so overweight in capital that they bought stakes in one another. In the US in the late 1990s, companies buy shares in themselves.
Despite these alarming similarities, there are also some key differences. The most important of these is that as far as we know, Western banks are not up to their necks in dodgy and unsuspected property loans of the type that sank the Japanese banking system. Russian and other bad-debt problems are mounting, but on the whole Western banks appear well capitalised enough to withstand a very considerable shock without going under.
We know this, because unlike their Japanese counterparts in the late 1980s, Western banks have reasonably transparent accounts. Furthermore, the US and European economies are much more flexible than that of Japan and are therefore capable of adapting quite quickly to changed circumstances.
None of this means we should all breathe a sigh of relief and plunge back into equities. As Martin Taylor, chief executive of Barclays, argues, we may, after the latest traumatic events in Russia, be looking at a considerable, worldwide credit crunch. If nobody will lend, economic activity dries up.
So, although we may not be heading for outright recession, we've probably got two or three very rocky years ahead of us. As a consequence, the fall on Wall Street could have a good deal further to go, notwithstanding its numerous attempts at a rally yesterday. The downswing may not be as deep or prolonged as Tokyo, and its consequences are unlikely to be as cataclysmic, but when a liquidity bubble deflates, the effects are always bad. It's just a question of degree.
- 1 Cyclist in Russia narrowly misses being hit by car and lorry
- 2 'F*ck it, I quit': KTVA reporter Charlo Greene quits live on air in spectacular fashion
- 3 What are your fingerprint words?
- 4 Gary Lineker involved in Twitter row after presenter rubbishes claims he will be warned by BBC over foul-mouthed tweets
- 5 Pink Floyd new album: Band unveil cover art for first record in 20 years
Rihanna 'nude pictures' claims emerge on 4Chan as hacking scandal continues
Slough train station deaths: Woman and child killed after being 'pushed in front of train'
Kim Kardashian 'nude photos' leaked on 4chan weeks after Jennifer Lawrence scandal
'F*ck it, I quit': KTVA reporter Charlo Greene quits live on air in spectacular fashion
Jennifer Lawrence: Leaked 4Chan sex video branded 'fake' by users
Scotland could still declare independence – even without referendum, says Alex Salmond
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Hilary Mantel 'should be investigated by police' over Margaret Thatcher assassination story, says Lord Bell
Plebgate MP Andrew Mitchell called officer a 'little s**t', claim court documents 'exposing ex-Chief Whip's 'record of abusing police'
Archbishop of Canterbury admits doubts about existence of God
Labour Party conference: Ed Balls to set out plan to freeze child benefit to balance books
iJobs Money & Business
£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...
£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...
£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...