Policymakers remain in the Denial phase

Farrell Aug11.pngA year ago, the blog feared we were “still towards the beginning of the crisis”, not at its end. Sadly, its judgement seems to have been correct.

2 weeks after that post, the US Federal Reserve launched its now infamous $600bn QE2 programme. The aim was to provide further massive stimulus to the global economy. Previous efforts had clearly not worked, and it feared the economy was already weakening.

Unfortunately, QE2 not only failed to stimulate a recovery, but actually made it more difficult to achieve. This was because it provided the high frequency traders with the liquidity they needed to push up food and energy prices on commodity markets:

• Recovery was already difficult with oil at $60/bbl
• It became almost impossible when it moved above $100/bbl

Clearly also, the Eurozone debt crisis has since got worse, not better. A year ago, Greece was the main problem. Now it is Italy, a G7 country.

The key issue is that policy makers are still in the Denial phase of the crisis, as the chart shows. This uses Elizabeth Kübler-Ross’ famous ‘Paradigm of Loss’ model as a guide on how the crisis is developing.

Investors, and some company managements, also remain in Denial. The hype surrounding QE2 led to a false sense of euphoria about the outlook. Even today, there is a clear lack of realism, and a focus instead on ‘onwards and upwards’ to peak earnings in 2015.

Q2 showed growth has stalled in both the USA and Europe. Yet many investors still believe the central banks will somehow be able to ride to the rescue and enable the world to avoid a seemingly inevitable recession.

Worryingly, though, we can see that the wider population is now moving into the Anger phase. Social unrest is building in many countries. Also, political systems have become more dysfunctional in the USA, Eurozone, Japan and even China.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.


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