There's no easy way out of this economic mess

Friday, 12 August 2011

Sell! If you've got it, sell it! That was the cry of traders on the markets of London, New York and Singapore over the last two weeks and won't be far from their lips in the coming weeks.

You don't need me to tell you why stock markets have shed billions of pounds but the more pertinent question is how do we stop the rot and prevent the world's economy falling back into recession.

Well, if I knew the answer to that I'd be writing this from my yacht in the Bahamas and I can assure you that the environment in which I currently pen this article, couldn't be much further away from a sun-kissed, paradise Caribbean island (well, apart from a can of Lilt on my desk).

However, it certainly does seem that the measures currently being considered to prevent Recession II are a little wide of the mark.

Firstly, the 2007/2008 downturn was triggered by reckless lending and borrowing on a scale that defied belief.

There is no way you could claim that either is happening at the moment.

In fact, individuals and companies are looking at the shaky economic environment and putting their cash away for a rain(ier) day.

A basic law learned by A-level economics students dictates that to be operating efficiently, businesses need to leveraged, but having had their fingers burnt in 2008 most firms are rightly scared to take out big loans.

While a prudent outlook, such a move is not the tonic to reinvigorate an economy of any size.

Meanwhile - and I bow to The Wall Street Journal for this one - the previous slump was caused by a breakdown in the financial sector's integrity, while this one has been triggered by a breakdown of confidence that the various governments of the world's biggest economies can manage their finances.

So, different factors got us into this mess but how do we get out?

Well, in essence it's all down to the markets.

If governments pump more money into their economies the rest of us will lose even more confidence in them and the problem will be exacerbated.

The only thing they can do is cut spending further and that won't be a popular move.

But if markets fall low enough then investors will eventually be tempted to enter on the buy side - as they say in The City - and the economic cycle will be given a jump start.

Read more: http://www.belfasttelegraph.co.uk/business/opinion/editor-viewpoint/theres-no-easy-way-out-of-this-economic-mess-16035657.html#ixzz1UzfaZE3D