Time to see ‘marketplace magic’ as the voodoo economics it really is
- The apparent inability of markets to see more than one step ahead is alarming at a time when stocks are surging and markets chase quick profits above all
- Multiple underlying problems are being overlooked, and a market failure to comprehend the fundamental causes of rising costs could spell financial disaster
Former US president Ronald Reagan spoke glowingly in the 1980s of the “magic of the marketplace” while former British prime minister Margaret Thatcher waxed lyrical about a “shareholder democracy”. Neither really knew what they were talking about.
This might seem a rather harsh judgment on two undoubtedly charismatic leaders, but neither Reagan’s talent as a Hollywood actor nor Thatcher’s as a popular orator really qualified them to pronounce upon economic and financial matters.
This is a much more clear and present danger than many realise. Investors, fund managers and market analysts have appeared in recent times to be desperate to put bad news behind them on the slightest hint of improvement in the global economy.
Stock investment is being driven by surplus liquidity in financial markets rather than by market “magic” or economic fundamentals, and this will come to an end because of either resurgent inflation or a resulting tightening from central banks draining money from the system.
A major correction in stock prices would reverberate deep into the global financial system, with knock-on effects on financial institutions – perhaps to the point of spectacular failures, as on past occasions. A stock market correction or even crash would harm the real economy.
Princeton University emeritus professor and 2015 Nobel Memorial Prize in Economic Sciences winner Angus Deaton wrote recently in the IMF’s Finance & Development publication that economists are in “disarray” over the causes of financial crises.
“We did not collectively predict the financial crisis and, worse still, we may have contributed to it through an overenthusiastic belief in the efficacy of markets, especially financial markets whose structure and implications we understood less well than we thought,” Deaton wrote. “Economists, who have prospered mightily over the past half-century, might fairly be accused of having a vested interest in capitalism as it currently operates.”
Maybe it is time now to review and revise our notions of what form of capitalism we want in the future and to abandon blind faith in marketplace “magic”.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs