The trouble with the World Economic Forum is that it has a propensity to become something of an echo chamber. Rather than promoting a plurality of different views, ideas and sentiments, the mood tends to get focused on a single, self-reinforcing consensus which is endlessly repeated and passed around, as if trending on social media. So it is with financial panics, which have an unnerving tendency to coincide with the annual conference in Davos. I’ve seen it happen on a number of occasions, most memorably in the run up to the invasion of Iraq, when the sense of fear for the future among financiers and policymakers was palpable.
It happened again in early 2009, in the depths of the banking crisis, when an end-of-days mentality hung over the conference. Somehow or the other, Davos amplifies these panics rather than calming them. This year threatens to be little different. Nobody here knows quite what to make of the latest stock market sell-off, and that, indeed, is part of the problem, for uncertainty breeds fear of loss and can easily degenerate into a collective dash for the exit. The danger is that we talk ourselves into something a good deal more serious than it should be.
There is no particular trigger for the latest panic. Most of, if not all, the concerns that underlie it have been with us for some time now — the apparent incompetence of once omnipotent Chinese policymakers in the face of a slowing economy, the collapsing oil price and the growing sense of geo-political instability that accompanies it. As for the rise in American interest rates, that happened a month ago, and had been widely signalled by the Federal Reserve for more than a year beforehand. Yet it is only now that this slight tweak to monetary policy has transmogrified in the eyes of investors from a benign and well-flagged response to an accelerating US economy into a grievous policy mistake that threatens to destabilise the world economy.
So what are we dealing with here; a long-overdue adjustment to asset prices unduly inflated by years of central bank money-printing, or a signal of tough times ahead for the real economy? It’s not hard to make the case for financial Armageddon; certainly, there are plenty of people here only too willing to imagine the worst. Start with the plunging oil price, which ought to be positive for the big consumer economies of the West — given that it puts more money in people’s pockets for spending on other things.
One worry, though, is that it is already causing such a hiatus in oil industry investment that today’s glut will in short order turn to famine, causing the price to surge anew. Back in the late Nineties, the Economist ran a cover on why the oil price would remain at $5 a barrel “for ever”. But as everyone knows, nothing is for ever and little more than 10 years later, it had risen to nearly $150.
The same cycle is being repeated today, with investment cut to a level that, in the long term, will leave supply more than a third lower than present demand. Markets are now anticipating the cooling effect of these higher prices to come. Another worry is that the low oil price will end up bankrupting Saudi Arabia, causing further chaos in an unstable region. Isil taking control of some of the world’s biggest oil reserves scarcely bears thinking about.
Meanwhile, a strong dollar in combination with collapsing commodity prices is threatening a wave of corporate bankruptcies in a world awash with dollar debt. To this list of woes must be added continued worries over China’s transition from to a consumer-led economy. Since the financial crisis, China has been the key source of growth in an otherwise stagnant global economy, but now this progress seems to have stalled. Stories abound of extreme unhappiness within the notoriously secretive Chinese high command. There is even talk of attempted coups. These scenarios may seem far-fetched, but what is undeniable is that all these concerns play into a world of extreme flux. Investors may crave stability and predictability. But for now, these are in lamentably short supply.