Earlier this week, MoneyWeek published an article by Martin Spring entitled "Why stockmarkets are still blowing bubbles". I hope they won't mind me quoting at length, because the article makes an extremely important point:
David Roche of the consultancy Independent Strategy says the defect in the argument that the world is on the path to recovery is "that none of the problems that caused the credit crisis have been resolved." Household and bank leverage is worse than before, the bad debt problem has not been dealt with, and we have a new level of profligacy and leverage – this time, in government.
Edward Chancellor of fund managers GMO says it's misleading to expect a sharp recovery from last year's collapse because of historical precedents. He contrasts the 19th century with the current situation.
Then "depressions were left to burn themselves out. There was no fiscal nor monetary stimulus; unviable businesses went under; households were not succoured with rate cuts and wage incomes fell; excessive debt burdens were resolved through default rather than bailout. Deflation purged the economy like a forest fire, preparing the ground for a rapid recovery."
By contrast, "the aim of policy today is to mitigate the pain of the economic downturn by all available means. Government deficits prevent the recession turning into a depression. The Federal Reserve cuts rates to zero and expands its balance sheet, thereby arresting the debt deflation. Such actions reduce the immediate social costs of the financial crisis, but they do not resolve the problems left behind by the credit boom."
I have felt for a while that the prospects of an early economic recovery were being over-hyped in the UK, and Friday's disappointing GDP statistics appear to confirm this.
The trouble is that people have been mistaking an exuberant stock market for a bona fide economic recovery. Yet in truth the rise of the FTSE is largely a product of the Bank of England's quantitative easing programme, as new money finds it way into financial assets, and is not backed by any genuine upturn in the real economy. Or to put it another way: it's just another bubble.