8/14/2019 Stimulating Debate

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Stimulating debate

The markets, and developed economies, are too dependenton government action

Feb 4th 2010 | From The Economist print edition

Illustration by S. Kambayashi

AS JANUARY goes, so goes the year. That old stockmarket saying does not augur well for2010, given that the MSCI World index fell by 4.2% in the month, the biggest decline sinceFebruary 2009, and emerging markets dropped by 5.6%.

Although markets rallied a bit in early February on better-than-expected economic data, thepoor start to the year reflected an inherent contradiction to the rebound of 2009. That rallyseemed to be dependent both on extraordinary stimulus measures by governments and centralbanks, and on a vigorous economic recovery. But both cannot co-exist for long: either therecovery will not last or, if it does, the stimulus will be taken away.

In addition, governments ability to provide that stimulus is dependent on the markets ownwillingness to fund huge deficits at very low yields. But why would investors accept meagreyields if they expected a vigorous recovery? In a sense, the market seemed to be hauling itself up by its own bootstraps.

Sure enough, the bullish story has started to unravel, if only at the edges. In the developingworld China has attempted to tighten monetary policy. That has caused some alarm becauseChina was acting as the engine of global growth.

And in the developed world investors have started to question the ability of governments tokeep financing their deficits. The obvious example is in Greece, where ten-year bond yields

reached 7% late last month. At that level, which is well above likely Greek GDP growth, the

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