Since the start of the year the stock markets have been going crazy. At one point global share prices were 20 percent below the high they reached last year. Some £2.8 trillion was wiped off shares.
Towards the end of last week the markets recovered. Does this mean we have witnessed one of those gyrations that sometimes affect securities markets but that have no wider meaning? The short answer is no.
The selloff reflected the two main forces that pulled the world economy out of the Great Recession of 2008-9. The first was action by the central banks. They took unprecedented measures, slashing interest rates to zero or near-zero levels and pumping money into the financial system through quantitative easing (QE).
Whether QE actually prevented the Great Recession becoming another Great Depression is highly disputed. But the most powerful central bank—the Federal Reserve Board (or Fed) in the US—has come under growing pressure to start raising interest rates from free-marketeers who argue that QE will lead to hyper-inflation.
In December 2015 the Fed gave way. Chair Jane Yellen announced an interest rate rise of 0.25 percent. She explained that the US was growing strongly enough to suggest the economy was “normalising”.
Many quite mainstream economists dispute this. They point out that the US growth rate is much lower than it was before the financial crash of 2007-8.
In any case, QE and low interest rates have made financial markets dependent on very cheap money. The Fed’s rate rise, indicating that the tap was being shut, was bound to be destabilising.
The chief investment officer of Times Warner Cable wrote last week, “The Fed has ignored Mr Market for a very long time and he has felt neglected and marginalised. Don’t be too surprised if his anger upends the best laid plans of mice and Fed.”
This remark, treating the financial markets as a person, is a splendid illustration of the revolutionary Karl Marx’s claim that “the capital relation reaches its most externalised and fetishised form” in the financial markets.
The second force ending the Great Recession was China. The Chinese government instructed the banks to lend on a massive scale, fuelling a huge debt-fuelled investment boom that inevitably spilled over into property and stock market bubbles.
Now Beijing is trying to wean the Chinese economy off its dependence on high investment in export industries and orient it more on domestic demand. This isn’t going well, partly thanks to bungles by the financial authorities that contributed to two stock market crashes in August and January.
Controls have been imposed to stop capital flight—nearly $700 billion fled China last year. Capital more generally is shunning “emerging market” economies that heavily borrowed the cheap money created by the Fed.
Then there is the collapse in the oil price. This is partly a consequence of China’s slowdown, which is cutting global demand for raw materials of all kinds. But it also reflects Saudi Arabia’s refusal to cut oil production in order to maintain the price.
The Saudi oil minister has made it clear that this is intended to squeeze the US shale oil and gas industry. This has expanded hugely in the past few years but its high costs make it vulnerable to a falling oil price.
When the price started to drop economic commentators cheered, claiming that lower energy and fuel costs would encourage consumers to spend. But, as often heavily indebted oil and gas companies cut back on investment and lay workers off, this has negative ripple effects on the rest of the economy. Fears about the oil price contributed to the share selloff.
The recovery in share prices was largely in response to hints by Mario Draghi, president of the European Central Bank (ECB), on Thursday of last week that the ECB might take further steps to stimulate the eurozone economy. So “Mr Market” continues to lean on the crutch provided by the central banks. Welcome to the new normal.