Policymakers' coddling of market failure exacerbates cycles of boom and bust
Andy Xie says market volatility is a feature of our boom-and-bust global economy today, and government policies that subsidise speculation by cushioning the downside are to blame
Low interest rates have spawned numerous Ponzi schemes around the world. The time seems to be up, at least for some. The shocks in oil prices, the Swiss franc, internet concept stocks and China's A-share market are the harbingers of what is to come. For speculators, 2015 will be the year of living dangerously.
The rising US dollar and falling property prices in China are symptoms of an ageing global bubble. They symbolise global monetary tightening in the form of a slowing velocity of money, indicating that less buying and selling is taking place. Bubbles don't last forever, even with policy support.
When the US Federal Reserve began its quantitative easing policy after the 2008 financial crisis, it triggered a sharp fall in the dollar and inflationary pressure in emerging economies. The latter sparked a credit-cum-investment boom, in China first. The resulting surge in commodity prices triggered an investment boom in emerging economies in general. The boom justified the declining dollar. The declining dollar, rising velocity of money and surging growth in emerging economies formed a self-sustaining dynamic.
An investment boom is a kind of Ponzi scheme; factories make money by helping others to build more factories. The process goes on as speculators increase exponentially. At some point, though, there won't be enough new speculators joining the game and overcapacity then becomes widespread. Deflation ensues.
Since 2008, China has overinvested by more than US$6 trillion. That overspending was the reason for high commodity prices and the boom in emerging economies. As China slides into deflation to digest the overcapacity, the commodity market is heading into the ice age. The rising dollar is a consequence, not the cause, of the deflationary phase in emerging markets. The feedback loop takes deflation into the developed economies, too.
The emerging market boom has fuelled multinational companies' profits and, hence, the stock markets in developed economies. That lit a fire in the property markets of major financial centres.