The only thing keeping Irish bond prices from collapsing is the assumption that Germany will eventually pay.
The young woman in a burka is clutching a Fendi handbag in one hand and an iPhone 5 in the other. She is surrounded by five friends, who are also in burkas. They are hovering at the entrance to a shoe shop in one of Abu Dhabi’s many large shopping centres. What has caught their eyes is a pair of shoes by Salvatore Ferragamo.
Does the name Salvatore Ferragamo mean anything to you?
If not, he was an Italian shoemaker who understood that there had to be some design in between high heels and flat shoes and, borrowing from the ancient Greeks, came up with the enormously popular and original concept of wedges in the late 1930s.
Obviously the wedges make women (and some men) look taller than they are, without the feeling that they are on narrow stilts. I suppose, at the end of the day, the taller you are, the more attractive you feel. Height allows you to wear different clothes, and you will tend to look slimmer.
By driving a wedge between actual height and desired height, the shoe can improve your overall image, making the best of the material, making wearers feel better about themselves and looking better than would otherwise be the case – or than actually is the case.
As a result, Ferragamo’s wedges were (and still are) huge all over the world, and his basic designs have been copied and re-worked by other shoe designers down through the decades.
As I walked by the crowded shoe shop in Abu Dhabi last Wednesday, a large TV screen tuned into some 24-hour financial channels turned red as stocks across the world plummeted. Just then, the similarity between the wedges and the world’s central banks struck me.
The world’s central banks have been injecting money into the global economic system and, in so doing, driving a wedge between the actual performance of the world economy – which is weak and risky at best – and the observed performance of the world’s financial markets, which are behaving as if the world’s economy is strong, risk is minimal and everything is rosy.
By injecting so much liquidity into the financial system, the world’s central banks are helping to push asset prices way above what is justified by the faltering performance of the underlying economies.
This is obviously a very dangerous game because, like someone wearing wedges to attain a desired height, that person has to keep wearing wedges just to stay there. Similarly, the central banks, led by the Fed, have to keep injecting more and more liquidity simply to keep asset prices where they are.
All across the world, from the Gulf, to China, Europe and of course the US, asset prices have risen and risen, but the old economies in Europe and in the US have not recovered in any material way. In fact, European economies are now going into reverse.
The central banks also know that, quite apart from this wedge between the asset prices and the real economy, if there were to be a crash with investors selling because prices are too high and can’t be justified, the impact on the underlying economy of yet another financial meltdown would be atrocious.
Thus, they are in a monumental bind – they are damned if they do and damned if they don’t. They have to keep printing money to avoid a crash, but the more they print, there is a greater risk of that crash they are trying to avoid.
In the Gulf, everything is jaundiced by oil. The economies here are booming, and the fact that the Etihad flights from Dublin are almost always full is yet another signal of the disparity of opportunity between Ireland and certain other parts of the world.
All over this city, Irish accents can be heard, so much so that one lad approached me on the street about an hour ago – a fella I’d never seen before – and asked me what I thought of the performance of the Irish soccer team against Spain.
His story is like that of hundreds of thousands of Irish people, and millions of others in our developed economies. Since 2007, the economies of the west have not been able to hit the reset button. We are unable to emerge from the depths, and unemployment remains far, far too high.
All the while, the emerging economies of the world continue to catch up, and a bigger and bigger proportion of the world’s economic activity is migrating towards east Asia.
Technological changes are also undermining job opportunities in the west and, clearly, paying back ludicrously huge debts is sucking the life out of local demand.
Significantly, the country that appears to be worst affected – and whose predicament the west wants to avoid at all costs – is Japan. Not surprisingly, given Japan’s deflationary slump, money-printing by the Bank of Japan has been more aggressive than in any other country. The Japanese quantitative easing experiment is three times bigger than that of the US.
Because of the sheer size of the Bank of Japan’s money-printing initiative, it is in Japan – still the world’s pre-eminent manufacturer – where the monetary conundrum between asset prices and the real economy is most evident. The higher prices go, the more stretched valuations become, and the greater the risk of a sell-off.
Japan’s demographics have swung against the country and, without local demand, the implication is that Japan has to rob other people’s demand through exports spurred by a much weaker currency.
All this was too much for investors to take last week, and the Japanese financial markets took a hammering. This slump has spread contagiously around the world. People see that the Japanese authorities are in a sort of trap, and the question is whether what started in Japan will end in New York.
Risk has returned and, therefore, risky assets have been sold off. Such risky assets also include government bonds on Europe’s periphery, such as Irish government bonds, because there can be precious few other assets where the disparity between the expensive prices and the stagnant underlying economy is more stark.
The only thing keeping Irish bond prices from collapsing is the assumption that Germany will eventually pay – something the German constitutional court in Karlsruhe, not the Dáil, will decide.
But we’ve been here before. There have been rallies and setbacks in financial markets all the time over the past few years. That said, maybe this time it is different, because there is no escaping the fact that the central banks have driven a wedge between soaring asset prices and the anaemic economy underneath.
Can they do this indefinitely? Or are we, like a woman in Salvatore Ferragamo’s highest wedges, flattering to deceive; knowing full well that, at these ever-elevated heights, the risk of tottering over at a party just keeps on increasing?
Good morning all
Enjoy the day
Hi David, if I saw you in Abu Dhabi I would have asked where are the safe assest these days? is there such a thing?
As yer mammy used to say:-
“Where will it all end David?”
Good article David There is no reversing course of the monetary expansion without a monetary collapse. It is the inevitable ending to a credit fueled boom. This boom in financial assets. The mother of all bubbles , the bond bubble. On the other hand, continued expansion of the money supply will stave off a disaster a little longer until people loose faith in the value of the currencies and the currencies are abandoned for a stable money. Jim Sinclair, http://www.jsmineset.com is urging everyone to remove all assets from the bankers clutches. That is stocks, bonds, investment portfolios and contents of… Read more »
Hi David, When I read this article the thought crossed my mind that finally the article I have been waiting to read from the floppy haired one who must be obeyed has been written. You have waxed lyrical (bonbon like) about speculation in housing but until this article was written I had not read anything from you re speculation and bubbles in bond and stock markets. Finally a very important article makes it onto the blog. You could have added that the increasing size of the bubbles is achieved through increasing the money supply with money borrowed into existence for… Read more »
What a great time to be in debt, waiting for the banks to fail all around the world! Seriously, though, let’s be clear on this. The world has been in a False Debt + War Recovery Mode since the 1800’s at least. This suits one class above all others. The very rich, most of whom can stand to see 99% of their wealth wiped and still live comfortably, with capital to buy up the ruins at rock-bottom prices. This is starting to happen in Ireland since the World War of 2008, which has resulted in the greatest transfer of wealth… Read more »
David’s argument is merely an illustration of a positive feedback loop that is gaining momentum and energy from the damage being wrought. It’ll stop only where is there is no more to destroy. Woe woe and loads of same…hum dee dum. Yes, we know where its headed and it’s not pretty. We are just witness to a collapse of all we value materially and nothing will stop it. My own view is that the western judeo-christian (I am sure there is a more academically correct term for same) dominant way of thinking has run its course. Like all organisations and… Read more »
You are right that the only thing presently keeping Irish bond prices from collapsing is the assumption that Germany will eventually pay, but that is and always has been a vain market hope, whatever the German constitutional court decides at Karlsruhe. The debt problem is much deeper and wider than that. It cannot be solved by government action alone. It is a global markets problem. The specter of a Detroit municipal bankruptcy is far more immediate and threatening in the minds of Wall Street traders than Karlsruhe. They know that Detroit would open the floodgates of municipal defaults in America… Read more »
There seems to have been an outbreak of MADness here, probably spread from Obama’s White House. Why is it DMcW’s valid point about bonds brings beads of MAD sweat? Obama is just a European really, a true Brit. After all, primes inter pares, what? And this nutcase wants thermonuclear war for his handlers? It is MADness, but typical (returned)-Tiger, to avoid homework. The average warhead now is 470 KILTOTONS, 10 times Hiroshima. 8+ of these per sub missile, 27 each on 18 Ohio-class boats. It is beyond insanity to use past experience with this. Stop the drivel about WWI or… Read more »
The height of foolishness knows no statosphere. Look at the case of Deutsche Bank, bailed out by the US, number 1 derivatives casino world wide. Germany will very soon face this horrendous Euro 70 Trillion problem, head on. what do you think Ireland or bonds will mean then? Are ye joking? FDIC VICE PRESIDENT THOMAS HOENIG TO GERMANY: GET SERIOUS ABOUT DEUTSCHE BANK! June 16 (EIRNS)–Sixty years after President Franklin Delano Roosevelt freed the U.S. from the control of Wall Street, with the Glass-Steagall Act that cut “investment” banks off from commercial banks and deposits and then from government support,… Read more »
bonbon I wish you would troll somewhere else. There are a few commenters worth reading on here. Your trolling is destroying what could be a good site.
For anyone who still believes there is a civil war going on in Syria see this video of Former French Foreign Minister Roland-Dumas saying he was told by British officials in London 2 years before the crisis that Britain was preparing gunmen to invade syria.
The crisis in Syria is a Western-backed invasion by Sunni jihadi terrorists.
Excellent article and analysis David.
The central banks have created a complete disconnect between the financial economy and the real economy; and are creating the biggest asset bubble in history; the bond markets.
The financial markets are addicted to free money; and like any addict they panic at the slightest hint of a reduction in their supply. This creates a very dangerous situation for the world.
We are drifting towards an abyss.
Active crescendo of buying leaves a 1500-2000 tonne demand in excess of supply. Even the western banks are buying, creating money from nothing and trading the paper junk for real money.
A great selection of comments to add to this theme
10,000 Chinese doing the right thing
QE to Infinity, followed by Gold balancing the balance sheets of the sovereign balance sheet disasters. Just as there is no tool other than QE to feign financial solvency, there is no tool to balance the balance sheet of the offending entities other than Gold. It is just that simple.
–Jim Sinclair, jsmineset.com, May 22, 2013
Casey Research What happens if the world’s monetary system fails? Stuck like a rabbit to a tar baby, we find the US government balled up to its collective ears in trying to use monetary policy to manage the complex system of a very large economy. It’s not just futile and doomed to failure, it is as counterproductive as can be. That’s because having a central bank, let alone one armed with a blank check, invariably leads to excesses… in government spending, in government debt, and in massive misallocations of capital that, in turn, extend like cracks in lake ice throughout… Read more »
A good compass for economic sustainability is to watch the brand which derives from a country’s endeavors. I wonder does it act as a pointer of how it self-manages. Here are a list of my prejudices. BEST PRACTICE BUT INSULAR: Germany, Sweden, Norway, Denmark (maybe Japan and other asian tigers?) etc – Engineering, precision etc. Management – Nothing allowed to be vague or open ended. Enter Karlsruhe. COMPLICATED & MESSY: France,Italy, Spain etc – Fashion, Art, Agri etc. Management – Aligned Communally, open ended. INSULAR BULLIES: UK, America – Lost all their brands. Not much good at anything aside from… Read more »
I am not the only one to compare the bond markets to drug addicts:
“The market is such an extreme QE junkie that, perversely, whenever there’s talk about the economy improving, stocks go down ……. because the market is addicted to this continuous infusion of cash.”
Excuse me for interrupting, but given the G8 meeting taking place at the moment, this second article by George Monbiot is worth a read.
Does the name Salvatore Ferragamo mean anything to you?
Absolutely nothing David. Does he drink in your local?
no free markets anymore
Protect your psyche and let me talk frankly for a minute. We are in a loft in the Garngad plotting supremacy of The Glasgow Celtic and will be happy even if that supremacy is asserted after our deaths. We are Irish brothers and our struggle is massive but we have vision despite our poverty and having to suffer abuse under the Scottish version of apartheid. We are willing to serve and who in their right minds would refuse to pull on that famous shirt? Not Many and I defy any Irish man on this earth to deny it! We are… Read more »
US secret servicemen disguised as farmers at the G8? I wonder if they have wellies? It’d be hilarious if a few have to pulled out of the bog!
You silly little boys are all asleep and I find you all as creepy as fuck. You are not the sort of people I’d want to shoot the breeze with but there are some who are sound because they want truth rather than the usual crap. They are sound because they have shown me friendship and given me the strength to carry on annoying the fuck out of everyone despite efforts to the contrary You know who you are I know who you are Some people can’t take the truth and so they stay asleep I also know the vast… Read more »
Yikes, this site has gone to the dogs!
Seems to be fewer and fewer contributors writing longer and longer submittals, at this rate it will ultimately be just Bonbon submitting a thesis every week. Davidmcwilliamsandbonbon.ie
We are da silly boys!
I’ve known some of you Irish Brothers for a while now.
You know what disappoints me?
You learn nothing and you are incurably conservative. It’s like you are incapable of seizing the truth and saying ‘to fuck with all this crap the bastards programmed me with since birth’
You still sound incredibly naive or you are plainly gullible and there for the conning.
Are you all thick or what
Look at your country. What do you see.
You should all be fucking ashamed and queuing up in the morning to make amends. Crude Selfish Bastards
Kiss the gold Brothers
100 Comments is great for a slow summer article. Awesome. Hampden in the sun Brother David and Hampden all covered in banners of green. Like 1972 and 1953. Was sixty this morning. Conclusion – we motivate each other when we stop beating about the bush get down to business. Some us are altruistic and some of us are selfish pricks Agitate and engage. It’s your purpose! If you think you can take a back seat and have it cushy them you are asleep Bigots would have driven us out of Scotland. They didn’t because we proved we just as good… Read more »
I wonder if its possible to lock some people out of writing on this site…could we at least keep it civilised and leave some of the more vulgar comments out, would be greatly appreciate, thanks all
Seems the Germans average wealth is lower than the average Greek. This may, to some extent, offer a reason why Germans do no wish to bail out the periphery.
There are some interesting graphs here too.
Plus an explanation of why wages are contracting even as asset prices rise, producing classic stagflation
David, QE, abled by computers, is not even akin to printing money but works as follows. Ignoring cash, we have a two tier electronic money system. The ECB, via the national central banks, electronically creates the first tier, central-bank-money. It does this by recording a new liability on its books to whichever institution borrows said money into existence and so this type of money is also matched by a debt back to the central bank. It is only the commercial banks and the government which can use this tier of money since other businesses and households cannot hold a central… Read more »
[…] in this way forever. A wide gap has opened up between valuations and fundamentals. This is what Irish economist David McWilliams, describes as the “wedge between soaring asset prices and the anaemic economy […]