There is huge uncertainty in global financial markets at present. Bloomberg reported on July 8 that hedge fund managers, who are the best compensated and supposedly smartest investors on Wall Street, “are dazed and confused”.
The news agency added: “Reeling from the worst second-quarter performance in a decade, hedge funds have scaled back trading as they struggle to figure out where markets are headed amid sometimes vicious crosscurrents in stock, commodities and other markets, according to brokers and managers.”
According to the Bloomberg article, hedge funds, which account for 20% of equities volumes in the US, are holding massive amounts of cash because they are unwilling to increase risks in this uncertain market. In other words, the hedge fund managers, who oversee $1,67-trillion in assets, are so unsure about the state of the global economy that they are sitting on cash rather than trying to earn returns. The Bloomberg article quoted Tim Ghriskey, chief investment officer at Solaris Asset Management, as saying: “There’s a degree of being frozen in the headlights, of not knowing what sectors to emphasise, or what securities to emphasise.”
The business media and many government spokespeople were eager to call an end to the global financial crisis and to speak of a recovery. The view that a recovery was under way led to optimism, which fostered a sense of stability and improvement in financial markets. This optimism spread to other sectors and improved conditions were seen in manufacturing as more firms replenished their inventories and curbed the laying-off of workers. Greece changed perceptions about the strength of the recovery. It reminded people of the enormous scale and long-term implications of the financial crisis and that many dangers lay ahead. The main challenge for many countries is how to reduce private and public levels of debt. The concern is how to reduce debt and shift to savings without causing further undue hurt in the economy.
The US has chosen to keep increasing its levels of government debt and to stimulate the economy until it feels sure enough that economic and employment growth is on the road to a stable recovery. The UK, on the other hand, seems to be moving forcefully to cut government spending, even though its economy has not begun to recover from the global financial crisis. Its actions to cut government spending may lead to further declines in economic growth, investment and employment. Greece has been forced to cut its spending as well. These spending cuts may also lead to relatively large drops in economic growth, investment and employment.
There is agreement that the US and most European countries will show poor economic performance and slow economic growth over the next few years. Drastic cuts in government spending could lead many countries back into recession and lead to deeper problems in the global economy. Government spending cuts could lead to decreased social spending and higher unemployment. Therefore, these cuts could lead to increased social unrest and political instability.
There has been no serious move by the G20 or any other international group to promote global financial stability after the global financial crisis. There was a rise of fascism and a world war after the Great Depression. Towards the end of World War II, the Bretton Woods Conference was called to discuss global financial and economic stability.
The aim was to avoid a repeat of the events that had led to the Great Depression. They understood that unregulated financial markets and capital flows created conditions for the crisis and put in place rules to try to regulate these. They created the conditions for global financial stability that promoted huge levels of investment and growth after World War II. Today, global leaders should not wait for another economic crisis or for political turmoil to worsen before they start discussions on how to promote global financial stability again.