By James Woolley, Portfolio Directors, Endless LLP
I don't know what day you are reading this, but let me tell you when I am writing this. It is 14 September 2011. I am telling you this for two reasons. The first is a disclaimer. Given the recent speed of events in issues impacting the world economy, if this article is already out of date, I apologise. Secondly, it marks the anniversary, for many in the UK, of when the world economy finally said enough is enough. You see, it was on 14 September 2007 that savers rushed to withdraw their funds from the financially stricken Northern Rock.
So let's take stock and see where we are, shall we?
Through August we had world stock market falls, a number of sovereign debt crises and the US losing its triple-A credit rating; all in the backdrop of Western economies showing signs of fragility. But this is nothing new. As I have said, this all began in 2007 when the US housing market began to head south and serious questions started to be asked about how solid some asset-backed securities really were. In fact, since then, the last four years have been a continued tale of one dramatic event to another.
So what could happen next?
These are huge events in their own right but in many cases have already become forgotten footnotes in the unfolding drama of this apparently never-ending financial crisis. Four years on from when the financial crisis began we appear no nearer to emerging from the current economic malaise that continues to blight both corporate and sovereign balance sheets alike throughout the Western world.
The trend of moving debt to stronger balance sheets looks likely to continue. At first it was corporate debt being assumed by sovereign states. Now we are seeing weaker sovereign states liabilities moving to stronger countries in an attempt to prevent a major nation being effectively declared bankrupt. Again, I apologise if this has actually happened by the time you are reading this.
At the same time, can we trust our governing politicians (who by seeking reappointment every four or five years are short termist in their nature) to preside over the hardest economic reforms in generations, reduce deficits and balance the books whilst GDP growth stagnates? A long term project the benefits of which will not be seen until well after Cameron, Sarkozy, Merkel and Obama have all been politely asked to step aside by their respective electorates. One could also question whether their own parties will have the appetite to continue with their austerity agendas when to do so could wreck their chances for re-election.
Could the Euro become a victim of this crisis? Eurobonds have become the latest potential solution to the sovereign debt crisis in the Eurozone, but perhaps they are too big a political pill to swallow with countries having to effectively sign over their fiscal policy to Brussels. Even the most ardent of Euro supporters would admit that this would prove highly unpopular with the public and would be political suicide for those politicians who espoused it. But without their creation is the Euro doomed to fail?
What demands will China place on its Western neighbours? As the biggest creditor of the US Government and with its own growth still steaming along at double digit rates, how China interprets its debt risk and how it manages to slow down its own economy will have a direct impact on the economies in the West. But whatever happens in this regard a power shift to the East seems to be accelerating.
And what about interest rates continuing at all time lows? Whilst economic commentators predict that interest rates will remain at the same level for the next couple of years, let us remember these are the same guys who as recently as at the beginning of 2011 were predicting UK rates to be between 1.5% and 2% at the end of the year. If we saw the collapse of the Euro, or one the Western economies abandoning their current austerity programme (or indeed going bust) or China acting unilaterally aggressively in the sovereign debt markets, who knows what knock on impact that would have for interest rates?
How much longer then will this financial crisis last? I would be a fool to try to even begin to put a timescale to it. Surely the lessons of the last four years should tell us that – but I can be fairly certain that there will be some more pretty seismic events to come. But you know what? In four years time I bet you won't remember them all.