China is busily easing money by changing the special deposit requirements; Brazil has started to ease by cutting interest rates; the US is experiencing better monetary growth as its banks are now in stronger health and capable of lending more, based on the quantitative easing and twists the Fed has already done; the UK has embarked on another round of energetic money printing; the European Central Bank under Mr Draghi has found a way round its constraints against financing weak governments and printing money. It is in the process of making huge sums available to the damaged European banking system on favourable terms.
Keep printing and carry on
There is a common theme to all this. The authorities in the West and the East are prepared to create more money and credit in any way under their control. They are all more afraid of falling output, a double-dip or a deep recession, than they are concerned about inflation.
Usually, when the world reflates together, riskier assets go up in price. The money has to go somewhere. The first port of call may well be equities. Commodities usually follow.
Creating lots of new money also produces some anomalies. The UK, needing to raise huge sums to pay for its excess public spending, has created an artificial scarcity of its own bonds, by buying up more of them than it is currently issuing as new for several recent months.
German bonds remain on tiny yields, despite the risk that Germany gets dragged into financing more of the losses and costs of the wider eurozone area. Investors at one and the same time bid inflation-linked bonds down to very small yields, implying they fear inflation, and bid conventional German, UK and US government bonds down to very low yields, implying they think inflation is no great issue.
We always need to remember that markets are neither rational nor right. They are just the best guess of values day-by-day, reflecting the interplay of bullish and bearish sentiments among many different people and companies.
Market anomalies
Markets may well be telling us things. Today they are telling us there is a lot more liquidity around to go into financial assets. Tomorrow they may have to tell us there are new fears, and there may be less risk money around.
So what could go wrong this time? The euro is far from fixed. Brinkmanship over Greece may trigger another crisis sometime. The drift of Portugal towards another rescue may bring some bad headlines. If the tough monetary medicine administered last year overdid it a bit in the emerging market world, we may see some worse figures out before things get better on the back of the new money.
Much of Europe is probably heading for recession, or is in it already. We think the best approach is to buy riskier assets only where the underlying position is reasonably strong, and to avoid getting carried away as markets enjoy one of their upwards rushes based on money printing around the world.
