Watching the markets this week you can't help but wonder when the day will come when things will return to normal. It seems every morning we wake up to some international regulator warning that the world's about to end, or reassuring us they have everything under control. The reality is that we're seeing a little trial-and-error policy-on-the-run being manufactured by some of the world's leading economies. How that will play out is anyone's guess.
It's important to remind ourselves of the fundamental problem that still exists. For at least a decade consumers and investors have been over-leveraged and spending beyond their means. There has also been a prevailing false paradigm that some markets can only go up. That is being unwound as we speak. It's a painful process and it's made even more painful given the political tensions involved, the resistance to change expressed by some, and the irrational nature of markets. It makes for one heck of a drama.
This weekend there are reports the G20 are going to put together a European Stability Mechanism - to go live some time next year. This is looks like some sort of insurance policy against fears of an imminent credit crunch in the region. Word of the policy has been welcomed and it's gained traction with the price of silver and gold being hit hard overnight - with investors feeling confident of moving out of the safe haven metals. The lacklustre share market response though indicates that the enthusiasm has been muted. We really are going to need to see some more credible, concrete, medium term fiscal austerity measures being rolled out across the euro region in coming weeks to see further stability return to the market.
Arguably the most crucial question of all, however, is whether some of the more vulnerable countries around the world will be able to survive the austerity measures currently being implemented. It's a fine balancing act. If they fail in their objective, some economies will stall and fall over, leading to an even greater crisis. If they succeed, the pain currently being felt may be alleviated somewhat. Either way, at least for the short to medium term, consumers will have to accept a lower standard of living while the economy returns back to equilibrium.
David Taylor
