Magazine article The Spectator

Living on Borrowed Time

Magazine article The Spectator

Living on Borrowed Time

Article excerpt

So when should we expect a great crash on Wall Street - or at least the cusp from a bull to a bear market - and on all other stock markets which will surely follow its lead?

It is one of a number of virtues of this persuasive, important and indeed brave, if in places difficult, book that Peter Warburton offers his own answer to that key question. What is more, it is not a Delphic oracle's answer. It is true that he offers more than one possible date, but all fall within the framework of the medium term. I shall pass them on but save them up to the end. In response to a charge of improper disclosure, I contend that Spectator readers with an interest in these matters are more likely to buy this book if they know that answer than if they don't. For that reason it is not like the disclosure of a final and unpredictable twist in the plot of a novel.

Like the arch speculator and brilliant philanthropist George Soros, and indeed like most other commentators, Mr Warburton is well aware that prices on Wall Street, and on what may be called its satellite exchanges elsewhere, have already soared way above anything that seems remotely sustainable. And yet:

No sooner does some well respected commentator deliver a prediction of impending financial doom than the stock market catapults even further into the stratosphere, spurring economic growth into the bargain.

Quite so. For the moment at any rate `people have decided to buy dips . . .' On the other hand, as against that, the author of Debt and Delusion reminds his readers of the record of bear markets over the lifetime of most of today's 'investors'.

By any reckoning the North American and Western European stock markets are overdue a bear market shake-out. In the half-century beginning in 1932 there were ten bear markets in US stocks - on average one every five years. To go to 15 years with only one (1987-88) is highly unusual. The average extent of retracement from the peak value of the stock market index to its nadir for those ten bear markets was more than 50 per cent; in other words, market values were cut in half.

And then a paragraph later:

To believe that there will never be another 50 per cent share price wipe-out requires either great faith in the evolution of more favourable economic circumstances or a blatant disregard for the lessons of history.

But at this point I must change tack. It would be a serious misrepresentation of Warburton's analysis to suggest that he sees the impending economic crisis as likely to be mainly the result of the bursting of a classic stock market bubble. It is true, as we have seen, that he flags up something like a probability of a '50 per cent share price wipe-out', which would presumably be more like than unlike a bursting bubble. But the main thrust of his analysis is otherwise and is indicated both by his title and by my epigraph from his book. The fundamental source of his predicted crisis and what has substantially contributed to the soaring prices on Western stock markets is a relatively new phenomenon: `an overaccumulation of debt'. To put the same point more dramatically and more specifically, what the author highlights is the exponential growth of international bond markets and the consequent mushrooming of new international credit: credit which central banks have chosen not to control. Already on his third page Peter Warburton discloses the truly astonishing growth of these markets over the last quarter of a century:

The world bond market has grown from less then $1 trillion ($1,000,000,000,000) in 1970 to more than $23 trillion in 1997. …

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