Pathetic markets want Bernanke to save them

IT was heady stuff. The price of gold smashed through the $1,900 level in after-hours trading last night, as investors worried about instability and inflation piled into the precious metal. It was not just gold: equities also rose yesterday.

Libya helped, of course, but there was one much more powerful reason why stock markets gained ground: Wall Street is hoping that Ben Bernanke, the Fed chairman, will unveil at least another $500bn in quantitative easing at his Jackson Hole speech on Friday. I can’t say I’m impressed. It is pathetic to see capitalism’s finest permanently begging the Fed to step in and create yet more liquidity, pushing down bond yields to even more-bubble like proportions.

The markets are hooked to Bernanke’s lethal elixir; every time he ramps up the printing presses, equities surge for a few months, as they did from last November. Eventually, the drug’s effect runs out, equity markets fall back and the clamour for more QE mounts again. Each time, the effect of the intervention becomes less significant and the pain from the hangover increases; eventually, catastrophe will ensue. Given how low US official rates, bond yields and mortgage rates have fallen, it ought to be clear that pushing down the cost of borrowing further is not the answer. Neither is printing more money, which will only end up pushing commodity prices up even further. When will anybody learn?

A BILLION CAR MILESTONE
EVERY so often, one stumbles upon a fact that tells us more about the world we now live in than reams of analysis or research. So here is my fact of the week: for the first time ever, there are now more than 1bn vehicles on the roads worldwide. Global registrations jumped 3.6 per cent to 1.015bn in 2010, up from 980m in 2009. The number, compiled by America’s WardsAuto.com, was found by examining official registrations and historical trends and includes cars, vans, trucks and buses currently in operation across the world. The total will of course have grown even further since the start of 2011, despite the increasingly sluggish state of the European and US economies.

Last year’s jump was the biggest percentage rise since 2000 and, as you might expect, was led by emerging economies, with traditionally car-mad America now accounting for just 23.6 per cent of total global vehicles on the road. More than half the increase was attributable to China – which now operates more vehicles than Japan – with Brazil enjoying the second largest volume jump and India the second fastest percentage growth rate.

As with all great factoids, this is one has much to teach us. The first lesson is that the West is no longer synonymous with the global economy (yes, this is obvious really, but it is shocking how many people still forget this, especially when talk of a possible Western recession is conflated with the altogether less likely prospect of a global one). The second is that as economies grow, consumers get richer and inevitably spend more on consumer durables, regardless of what their governments might want: slowly but surely, China’s export and investment-led model will turn into something more normal, with its consumption and imports helping to boost global demand.

Another even more fundamental point is that there are currently 6.94bn people in the world. If we assume that around 5bn of these are adults, this suggests that the number of cars and vans on the roads could eventually triple or quadruple as billions of people become as wealthy as today’s Americans as the century progresses. Unless electric motors eventually become truly commercially and practically viable – and I very much hope that they do – the demand for oil will continue to explode, giving even more power to oil producing countries and continuously putting upwards pressure on prices. With a bit of luck, Muammar Gaddafi’s deranged regime will soon be history and Libya run by a government that is less hostile to its people’s interests (assuming, that is, that extremists don’t take over). But the world’s unquenchable thirst for oil means that the paradox of plenty will continue to haunt many African and Middle Eastern countries for years to come: countries that are amply endowed with natural resources, such as oil or diamonds, tend to suffer from extreme misgovernment, poverty and misery. Iran and Libya are cases in point. Countries that start off with little or no natural endowments – such as Hong Kong – and are forced to exploit their human capital have tended to enjoy far better outcomes. We must hope that the Arab Spring will finally start to refute the paradox of plenty. But unless political change is accompanied by true liberalism and free-market reforms, unlike what has happened so far in Egypt and even Tunisia, prosperity will tragically continue to elude the region.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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