The tsunami of liquidity washing through financial markets now threatens to drown us all in a destructive wave. Markets are not directing this excess liquidity in any meaningful way. That much is obvious from their antics in recent days.
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It seems that stock markets from New York to Tokyo have been going wild in anticipation of increased financial liquidity on the back of the US Federal Reserve’s decision to cut rates slightly, while long-term bond markets are signalling a retreat that could severely harm the global economy.
Welcome to the madness of markets, just at a time when political stability is lacking – again from the US to Japan – when international trade has been disrupted by US President Donald Trump’s tariffs and when the global monetary order is in flux.
This is not doom-mongering; it is simple common sense compared to the mindless charge of financial markets from pillar to post as they pursue the highest returns that can be found, seemingly regardless of economic and social risk.
Stock markets suffer periodic bouts of “irrational exuberance”, to reference the term popularised by former US Federal Reserve chairman Alan Greenspan, and since Trump made a supposed concession by lowering some tariffs to a point still higher than they had been originally, markets have gone to new extremes.
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After just another turn of the market wheel, you might think the truth is that the “liquidity trap” is being spun ever faster by loose credit created in the wake of the Covid-19 pandemic and by the fact that savings – such as those from pension payments – are steadily pouring into stocks.