In July 2009 I wrote “It is my contention that this second down leg will likely be met by even more bailouts, greater government intervention and more money printing in larger and larger quantities.” We now know this to be the case.
We heard from the G20 last Friday that they “commit to take all necessary actions to preserve the stability of banking systems and financial markets as required” and we know that they plan to unveil a “solution” by their next meeting in Cannes on 4 November.
We’ve also heard from the IMF that they want “coordinated action” to help prevent a global financial crisis and there have been numerous other voices in favour of a strong and coordinated response.
What’s coming in my opinion is around $6 trillion in coordinated stimulus from global central banks – around 10% of global GDP.
We know to expect around $2 trillion from the eurozone but we can also expect more stimulus spending from the US, UK, Japan and China. And don’t be surprised if it’s all rolled into the same announcement.
So rather than letting our broken financial system reset so that we can begin a new cycle of prosperity we are once again going to throw good money after bad in a vain attempt to restore economic growth. The fact is, if you print enough money and build enough bridges to nowhere, you will boost GDP but as I’ve said before, GDP growth and true economic prosperity are two very different things.
So what does all this mean for financial markets? Well they are up right now on the news that a “rescue plan” is on its way but markets are impatient and fickle and I think there is plenty of scope for further falls between now and the announcement of the grand plan. Once the new stimulus does arrive however I expect the ‘risk trade’ to be back on with a vengeance.