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Which comes first, the market or the economy?
China's stock market's collapse over the past month has been the main talking point in most financial reports. Together with descriptions of how wild the swings have been, we also hear of experts calling on the central government to unleash more stimulus for the economy, and/or more monetary easing to prop up stocks. So it is that we've seen interest rate and bank reserve ratio cuts, plus the easing of rules to allow state pension funds to buy more stocks. All of this strikes me as rather odd, this reliance on officialdom to bail everyone one since I was always under the impression that this is a "buyers beware'' market and risk is an integral part of that market. If central banks and governments are always relied upon to support the market when it crashes through the folly of its participants, then where's the risk? And if there's no risk, then how can there be proper price discovery, allocation of assets to their best uses and so on, ie the normal things that markets are supposed to do?
To my mind, the asset allocation/price discovery processes have been distorted by "quantitative easing'' a convenient euphemism to mask unbridled money printing. This isn't economics or high finance by any stretch. This is simply a no-brainer solution driven by expediency - if there's a danger of collapse, no worries, all we have to do is print money, flood the market and prices will float up in a tide of liquidity. When this happens, we'll all look good and we can get on with life as per normal.
This is really the source of the economic problems in the world today, the quick-fix offered by QE. This was started by the Fed when Lehman went bust under the weight of its crooked Minibonds in 2008, and has since been latched upon by all the major central banks from Japan to Europe. Well guess what? It might have worked for a few years but trying to push the market up and hoping that it takes the economy with it is a foolish strategy that I think simply won't have asustainably useful impact. I wrote this many years ago in a commentary when the Fed first stepped in to bail out its crooked banks in 2008-2009 and I still believe it today - you have to fix the economy first and then the market will perform, and not force the market to perform and expect the economy to follow.
To this end, I'll be very surprised if the US's 2 per cent growth rate is sustained in the months ahead. Markets may be expecting a September or December rate hike but I think none is justified. Needless to say, I'm also not surprised that China's economy is slowing as it is.There's been simply too much reliance on monetary policy and stock markets to fix economic flaws.