“You studying economics then?”
“No, I was just curious,” I reply.
“It’s all going to go to pot again, you know. People think they can get something for free, and they get too greedy.”
This is not the first time this has happened to me recently, and given how the fiscal problems of Greece, Portugal and even the US have hogged the headlines in recent weeks, macroeconomic doom mongering is fashionable again among the chattering classes – being in the red is the ‘new black’ if you will.
I’m guessing it is the mass media, rather than our wealth managers or IFAs, which is most responsible for our financial education today and, without wanting to state the obvious, it is also the cause of market movements. However, the curious language often used to describe the predicament that countries are in can confuse. A few years ago, the possibility of an economy like Greece defaulting would be unthinkable. In the current climate commentators will talk of an ‘orderly’ or ‘organised’ default and nobody is spooked.
“I’ll make a bold prediction; if there is a structural default in Greece the markets will initially fall but on the day the FTSE index will be up,” says Alan Higgins, head of investment strategy at Coutts.
“It will probably happen over a weekend, and there will be [BBC business editor] Robert Peston on the TV doing his bit. On Monday morning markets will plunge, but unlike with what happened with Lehman Brothers, I don’t think I’ve met anyone who doesn’t think Greece will default now because everyone is so well informed. It is so discounted that if it is done in a well-organised structural way then markets will rally and catch people out. What’s not discounted is chaos.”
Avoiding the ‘d’ word
The ECB and other international bodies have been careful to avoid the ‘d’ word this year, but it’s hard to see why when it evidently carries so little weight in people’s minds. It would appear there’s little to fear (at least for equities) from a consensus view.
Similarly, there’s a reason why few seem too concerned about the US breaching its $14.3trn debt limit. The ceiling will be raised, we’re all sure, no matter how bad-tempered the party within Congress. That’s the consensus we’re all sticking too, so let’s pray there’s no other outcome.
I’ve yet to get the chance to read much further into Galbraith’s classic cautionary tale, though I’ll predict that it’s the unpredictable that’s the cause of the chaos that ensues.
