A year of prevarication

In: Uncategorized

13 Dec 2010

This is my last Fund Strategy comment on the year. The next issue will be published on 13 January 2011.

It is generally hard to find a simple way to characterise any year. There are many competitors for the title of key event or trend. But if 2010 were to be described in one phrase, it should probably be “the year of prevarication”.

With the advanced economies starting to recover, and developing economies generally growing strongly, it would have been an ideal year to begin tackling structural weaknesses. Instead, the instinct of politicians and businesses was simply to muddle through the situations they found themselves in.

In the two previous years there were credible reasons to focus more on the short term. The focus in 2008 was on tackling the financial crisis. Last year the emphasis was on stabilisation.

Indeed, with the benefit of hindsight, it should be clear that it would have been better to start grappling with fundamental economic problems earlier on. Letting more banks go under would have hurt in the short term but by now the developed economies could be on a stronger path to recovery.

In any case, by 2010 there was no excuse. The developed economies were recovering slowly and they were benefiting from strong growth in the poorer countries.

These were almost ideal circumstances to start tackling the chronic atrophy of the productive sector in the West. Stimulus money could have been used to bolster infrastructure to help provide a framework for growth. Weak businesses could be allowed to fail and new points of production nurtured.

Instead, the massive stimulus injected into the developed economies was mainly used to shore up demand. Its effect was mainly to give a short-term boost to consumption rather than a long-term lift to output.

At the same time corporations, many of them cash rich, often preferred to sit on their assets. There was relatively little investment for the future.

Under such circumstances it would not be surprising if much of the western stimulus found its way into developing countries. Although there is nothing inherently wrong with foreign investment, this outflow was probably helping to create a bubble.

Meanwhile, in the eurozone the emphasis was on shoring up the banking system. Although the discussion focused on sovereign debt, the underlying concern was that the region’s banks would collapse. Few were interested in addressing the inherent rigidities of the eurozone, let alone the weaknesses of the underlying economy.

It was a year of prevarication and missed opportunities. There must be a fundamental shift in attitudes if next year is to be any better.