Is another crisis in the offing or is it just an August wobble? One of the fears stalking global markets is the idea that every country wants a weaker currency. That such a state of affairs is logically impossible is reason enough to elicit worries about financial instability.
China’s mini devaluation is uppermost in investors minds but a 22 per cent drop in Kazakhstan’s currency has reminded traders of what happened next when the Thai baht devalued in the late 1990s. That sparked an emerging-market crisis that went on to infect major stock markets.
There are at least three other countries ending in “stan” that are the focus of the foreign exchanges, as well as many other emerging markets. One of the many oddities is that this has been accompanied by a rise in the euro, not least against the dollar and sterling: perhaps it’s just a case of something having to go up, not everything can go down.
Currencies are, in fact, only a symptom of malaise; the real worry is that in one or more countries lurks a debt problem that could suddenly erupt, a bit like the US subprime mortgage debacle which led to the most recent financial crisis.
Some investors have been on the look-out for trouble for some time. This column has remarked on several occasions that for as long as official interest rates on both sides of the Atlantic hover around zero, all is far from well with the world. Those low interest rates signal extremely subdued growth expectations. Many commentators suggest a growth slowdown, from whatever source, cannot be countered any longer with monetary stimulus: interest rates at negligible levels cannot be cut any further.
This may well be right, but only if central banks continue to make policy mistakes. While it is clear the European Central Bank will remain heavily politically constrained in its ability to ease further, there is less of a problem for the US Federal Reserve or the Bank of England.
It is not beyond the realms of possibility that quantitative easing will be resumed in the UK and the US – but few, if any, market participants think this is remotely likely.
If the current market turmoil really is a reflection of a slowing world economy – a big if – the real problem is that no government is either willing or able to contemplate loosening the fiscal purse strings. Hence all the worries that the economic policy locker is now empty.
Any country with dangerously high debt levels that now goes into recession will almost certainly face a Greece-style crisis. Indeed, one of the prime candidates is Greece itself: its third and most recent bailout will almost certainly not be the last one it will have to consider.
Those low interest rates are the clearest signs of all these financial fragilities. The world economy is still very susceptible to problems wherever and whenever they pop up. So far, all we have witnessed is a relatively small drop in global stock markets. Things have yet to turn really ugly. But equities have fallen from elevated levels and remain vulnerable.
The monetary system is in a weird place: it is whispered that should more quantitative easing be necessary its next manifestation will be cheques in the post for everyone. While that might sound outlandish, it remains the case that the trillions injected into the global financial system have not had much effect. That’s why there are worries over growth:the money is there but nobody is spending it.
Of course, there isn’t much we can do about the state of the world. It is important to stress that what is happening could just turn out to be one of those strange financial events that disappears as quickly and as mysteriously as it arrived. But there are enough signs of trouble to be concerned. If a financial earthquake of any proportion is building, its epicentre is going to be unsustainable debt.
In such circumstances it would be wise not to add to our own borrowing levels. A wise but unlikely choice would simply be to cancel the upcoming “giveaway” budget.
