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.
Diving in at the deep end is no excuse for shirking the style stakes
- 2 Belgium fan Axelle Despiegelaere lands L'Oreal campaign after World Cup viral photo
- 3 Why I'm on the brink of burning my Israeli passport
- 5 Blackest is the new black: Scientists have developed a material so dark that you can't see it...
Pope Francis: ‘One in 50’ Catholic priests, bishops and cardinals is a paedophile
Fry ‘criticises Operation Yewtree in dinner party rant’ calling for tougher laws to deter false sex abuse allegations
Supermoon 2014 in pictures: The moon appeared bigger and brighter at the weekend
Saharan remains may be evidence of first race war, 13,000 years ago
Israel-Gaza conflict: ‘Sderot cinema’ image shows Israelis with popcorn and chairs 'cheering as missiles strike Palestinian targets'
Sustained immigration has not harmed Britons' employment, say government advisers
War is war: Why I stand with Israel
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
Socialist Worker called to apologise over ‘vile’ article saying Eton schoolboy Horatio Chapple's death is ‘reason to save the polar bears’
Emergency data law: David Cameron plots to bring back snoopers’ charter
NUT strike: David Cameron announces crackdown on strike action ahead of mass industrial action
iJobs Money & Business
£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...
£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...
£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...
£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...