Stock markets, the Euro and crazy commodities

At the close of play yesterday, the value of many stock markets around the world were severely reduced as a result of financial market uncertainty.

Billions of pounds were wiped off the FTSE100 while Japan’s Nikkei and South Korea’s Kospi fell by 3.5%.

The chain of events ripped through the global economy with fears of another crisis imminent. Fears that both Spain and Italy would need a bailout from the European Central Bank combined with forecasted poor economic results in the US led the Dow Jones Index to fall by 4.3%.

When the US sneezes, the rest of the world catches a cold.

European and Asian stock markets all fell as investors, worldwide, showed collective unease.

Investors are showing a clear sign that the stock market is not a good place to invest at the present time – there is no confidence in foreign nor domestic governments to achieve growth or pay their debts.

As a result, investors have moved their finance from stock markets and into commodities, in particular, gold.

This is more than just numbers on a sheet as it affects everyone. Pension funds, in particular, will have the value of their investment slashed as their portfolio of stocks is under threat.

This is potentially not the end. The yield on Italian 10 year bonds crept over that of Spain (at the time of writing) indicating the concern with Italy’s government to take the necessary control. It is furthermore an indication of the uncertainty with the eurozone’s ability to deal with the debt crisis.

Will Germany have to stump up extra cash to bolster the loan fund available to sovereign states? Only a full blown guarantee of maintaining the euro in its present form would work but this would imply an unlimited exposure. Domestically, can Germany afford to do this both financially and politically?

This is the clearest sign of the severe lack of confidence in the markets. Theoretically, this strikes at the heart of the economic debate.

Orthodox economics suggests that a state should balance their books and cut back when they can’t afford which will show the markets they can invest in a sensible and prudent economy. This investment will drive growth and stimulate further investment.

Keynesian economics suggests that when times are tough, the state should intervene and plug the gap in the economy and spend. This will drive growth which will allow the debts to be serviced and investment can be encouraged.

The UK government has certainly picked the former. However, markets have moved away from Spain, Portugal, Greece, Italy and Ireland because of their inability to grow and thus pay their debts. Investors feel uneasy about the lack of US economic growth and high unemployment levels. While the UK is perceived to be ‘fiscally responsible’ there has hardly been any growth over the past 9 months.

These are tough economic times and politicians have the unenviable job of always being one step behind the much-sought after financial markets.

At times like this, we need a strong economic leader to drive key global coordination.

This, once again, is not about partisan point-scoring. The global economy is potentially under threat.

History in the making? Only time will tell.


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