Crisis? Which crisis?

After the Great Moderation comes the Great Reckoning, says Cheviot Asset Management’s David Miller.


Governments have chosen this path, but where the voters have been consulted they have opted for change. We already have a new Irish government and there will be others. In addition there are indicationsin the fiscally prudent part of Europe whether in Finland or Germany that the voters disagree with their elected representatives.

The crisis, if there is to be one in Europe, is now more likely to be persistently low growth, high employment and perhaps social unrest similar to what was seen in the UK during the 1980’s, rather than anything that financial markets may impose. It will be a close call, but on balance it seems that Germany will decide to use its financial strength to maintain the stability of the Eurozone.

In contrast, the US has decided to call the markets bluff. It is a dangerous game as it requires a number of different interested parties to agree to continue to finance the US deficit at extraordinarily low interest rates. The US has been in debt before, but to countries that relied on the US for national security such as Germany and Japan. China is thought to own over $1 trillion US Government debt, but has no such security needs.


For the moment the Chinese are grappling with how best to slow their domestic economy and reduce inflation without creating unemployment. Fortunately, chaos in the global financial system is the last thing that they want as the latest 5 year plan is rolled out.

It contains some extraordinary ambitions including average GDP growth of 7%, the building of 36 million new homes and the creation of 45 million new urban jobs. Included in the fine print is the plan to build 29,000 kilometres of railway track which puts the UK high speed link between London and Birmingham (225 kilometres) into perspective.

Despite recent volatility there is evidence in financial markets, whether it is in foreign exchange rates or the price of gold, that sentiment towards US assets has shifted. In particular the US need to remember that owning dollars, which are still used to settle 62% of world trade, is a voluntary activity for many in the newly wealthy emerging nations. To quote a Brazilian businessman who I met recently, ‘we may think in US Dollars, but we are not Americans’.

It will come as no surprise to see investors including the Chinese continuing to use their dollar reserves to buy a wide range of global assets including equities and perhaps surprisingly, given the headlines, European debt.

Governments around the world are making choices. In Europe it is prudence, low growth and political risk whereas in the US domestic concerns have trumped market risk .Whether voters or financial markets will comply is another matter. After the Great Moderation comes the Great Reckoning.


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