Shaky

An excellent indication of the sorry state of the global economy is the degree of scepticism regarding any seemingly positive development. Examples abound, but here are a few outstanding ones:

Oil: a fall of some $35 in the price of a barrel of oil, from the July peak of $147 to around $111-112 earlier this week, is surely good news to everyone. But is it too good to be true? On the one hand, demand is clearly falling so the decline is justified and could go further. On the other hand, dangers of supply disruptions abound, whether from weather or from terrorist or other military action. Just how brittle the market still is became clear on Thursday, when Goldman Sachs renewed their forecast of a price at or above $150 by the end of the year – sending the price soaring back to almost $120.

The mortgage crisis: although it might be asking a lot of people, it really is useful to differentiate between different bits of the overall debt crisis – and even of the mortgage crisis, which is where the problems began. Specifically, there is the vexed issue of Fannie Mae and Freddie Mac, special government entities created to buy and repackage household mortgages into their own mortgage-backed bonds, which are then bought by institutions and investors across the world. Let’s skip the how and why these entities reached the point of bankruptcy; just accept that that’s where they are, and that it is unthinkable that the American government would actually let them go bust. The fact that they are perceived as quasi-governmental entities that carry an implicit government guarantee is not the whole, or even main answer, why they mustn’t go bust. More persuasive is the fact that if they did, the financial world as we know it would come to an end – it really would be 1929 all over again, with the Great Depression to follow. They can’t let that happen, therefore they won’t.

But the Bush Administration is determined to maintain the pretence that these are privately-owned companies and that it must not nationalise them. As a result of this farcical pretence, Fannie and Freddie’s shares continue trading and – would you believe – keep falling, despite the efforts to rig the market and prevent this happening (eg by making it difficult to sell their shares ‘short’). The achievement represented by the passing of the Franks-Dodd bill — which moved forward the whole process of recognising the huge losses that the financial sector has incurred from mortgages and spreading the pain between lenders, borrowers and the government – has thus been overshadowed by the baleful stock-market presence of two companies that shouldn’t exist in their present form, and soon won’t.

The shekel: It’s not just overseas that even when things go right, they seem to go wrong soon after. The efforts to stabilise and then reverse the rise in the shekel’s value seemed finally to be succeeding. The Bank of Israel was obliged to get serious and spend $100 million a day, instead of $25 million, which put a stop to the rot back in July. Then the dollar started strengthening around the world, which sent the shekel down further, to around 3.60 to the dollar. But for some reason, the desperately-needed decline in the Israeli currency – already having a serious negative impact on the high-tech sector and on manufactured exports generally – ran out of steam and the currency spent the last couple of weeks between 3.55 and 3.60.

Yesterday, for no apparent reason other than summertime blues on some currency trading desks, the shekel started rising again. It rose and rose, from a starting point of 3.57 to around 3.49 at this time of writing. But, like oil and mortgages, this is not just a market spiel for traders to make or lose money in. This affects everyone, because tens of thousands of jobs are on the line if the shekel stays so high, and the slowdown in the economy that is now a certainty could degenerate into a much longer and deeper recession.

Unfortunately, these examples are a fair reflection of the reversal that has taken place in the economic environment over the last 12-18 months. Where once boundless optimism reigned, so that even bad news was given a positive spin, now sentiment is moving toward the opposite extreme. Anything positive is regarded with suspicion and treated under the assumption that it can’t be good, and if it is, it won’t last. Fortunately, that mindset will also pass – but probably not anytime soon.

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