After the dot.com and the sub prime/cov light fiascos, the global economy is entering another artificial economic bubble, inflated by quantitative easing and cheap money.
By Jack Peat
Hate to put a damper on things, but this economic recovery; it ain’t real.
This week’s business news has offered the first reliable evidence of so-called ‘green shoots’ of recovery since the term was first spluttered by Baroness Vadera in an ill-fated account of events in 2009. All three key sectors – manufacturing, construction and services – are signalling growth, and the FTSE 100 (however out of touch with reality it may be) has hit highs not seen in over 13 years, signalling that growth – at least in the short-term – has returned to the UK.
At this point, given the strong fundamentals, it is easy to envisage an end to the boom and bust cycles that have ravished our economy since the war. But let’s not fall prey to the shortsighted visions of contemporary economics that stifled Gordon Brown in ‘97 when he set out plans for an economy built not on the shifting sands of boom and bust, but on the bedrock of prudent and wise economic management for the long term. In Twitter parlance; #spoketosoon, adequately summarises what followed.
I would postulate that we are not in a boom and bust era – of depressions and recessions – but rather trapped in a bubble and burst cycle, in which one key sector artificially drives growth before bursting with widespread ramifications.
Dot Com bubble
The Dot-com Bubble (or Tech Bubble) was a speculative bubble in the shares of early internet companies called Dot-coms. As the stock market started to boom, economists speculated there might be a ‘new economy’ in which inflation was virtually nonexistent based on a new age of technology which would replace the ‘old economy’ of traditional brick-and-mortar businesses.
This resulted in dot-com companies run by young people lacking clear business plans going public and raising hundreds of millions of dollars of capital. At the peak of the dot-com bubble in 1999 it was said that a new millionaire was created every 60 seconds in Silicon Valley, but that was never to last, and by early 2000, reality started to sink in.
Within months, the NASDAQ stock index crashed from 5,000 to 2,000. Hundreds of stocks were off the map as quickly as they appeared and panic selling ensued as the stock market’s value plunged by trillions of dollars. The ‘new economy’ theory was categorically proved wrong, but a new age of artificial bubbles was created.
Real estate bubble
Houses were once places to live, rather than estates in which to secure or grow money. Ask someone who bought a decent property for under £20,000 in the 1980s whether negative equity was ever a consideration and I imagine it would never have crossed their mind. But a surge in demand pushed these prices up by hundreds and sometimes thousands of percentage points, which led to economic bubble number two.
The housing bubble was created by high demand for housing and easy credit conditions which enabled these demands to be satisfied. What’s more, households took on substantial amounts of debt at ever increasing multiples of income thanks to the credit conditions, with spending outpacing take-home pay and lowering the savings rate to unprecedented levels. In all, UK house prices soared to around nine-times the average salary, creating an inflated bubble waiting to burst.
Cheap money bubble
The final bubble is yet to burst, but it is being created as we speak. We are facing a bonds/cheap money/Quantitative Easing/property bubble that will eventually pop with devastating consequences for the global economy.
House prices are rising and the rush of first time buyers into the market (up 78.6 per cent year on year in April) has picked up thanks to government schemes which are ultimately building a houses on sand, rather than concrete. Mr Osborne’s credit easing policies are adding fuel to the fire, and there is still a spate of zombie firms and households propped up by artificially cheap money.
Allister Heath of CityAM recently outlined the short term credentials of economic growth in the country, but look mid-term, and the outlook seems far more bleak. “The economy is a giant house of cards,” he said, “at some point, it will come tumbling down, and when that happens today’s modest recovery will soon be forgotten.”