Stock prices have been soaring for the past eight months, so investors must be confident. But, in America at least, consumers are saving an ever increasing share of their income aside for the rainy day.
Who has the better sense of the long term, the consumer who is relying on intuition and instinct, or the investor who has the benefit of years of study ,analysts reports, surveys and company accounts?
I am afraid I believe the consumers have a better handle on reality. The consumers see that the banks problems have not disappeared. They have simply been postponed or transferred to Governments. They see that some banks have become too big for the tax bases of the Governments that feel obliged to guarantee them. They are doubtful about whether they will have an adequate pension or healthcare system when they come to rely on both and feel that building up a nest egg might be prudent. They have also had a look with new eyes at all the things they already have lying around the house that they would have to dump to make room for new purchases, and are concluding that they can get by with what they already have a little while longer. And, in the United States at least, they are looking at neighbours, 11 million of them, who have lost their jobs and over 9 million neighbours working shorter hours than they say they would like to.
So how do we explain investor confidence? A lot of the investors are not actually investing their own money but somebody else’s. Notwithstanding all the talk about changing the way people in the financial sector are paid, a lot of the investors are still rewarded royally for short term results but are at no personal risk if the investments turn out badly in the longer term. Furthermore the investors are able to use exceptionally cheap money provided by central banks which they can get a good return on from credit starved businesses. Other parts of the economy may be downsizing but so far the financial sector is not.
My own sense is that the model upon which the world economy has to change. Over indebted consumers in the United States and a few other countries can no longer carry the world economy forward. Economies like China and Germany ,who have built their success on exporting to these consumers , have to adjust to the fact that their customers are going to be saving more, and spending less. And in doing so they will also ,incidentally and unintentionally, be reducing their carbon footprint.
I believe we will see a return to meeting basic needs. The future economic growth will not come from jaded western consumers, but from consumers in developing countries who have not yet met basic needs like food, shelter, a refrigerator and a small car. It will come from the elderly who will be living alone in increasing numbers and will need better means of looking after themselves.
Every crisis is a means of bringing about change. The change that has to be brought about by the economic crisis of 2008 has not happened yet,