I am in Hong Kong, enjoying a wonderful view over the harbour towards Kowloon.
Here, it seems to be always boom time. Hong Kong has its occasional crashes and crises, but the default mode is one of optimism, expansion, innovation. Hong Kong is a crucial bridge between Europe and Asia, between the City of London, and the wealth of the Asian savers and sovereign wealth funds. It is Europe’s window on the new world, and Asia’s window on the old world.
People ask me, what is the “Money Trap”?
This is how I answer them:
The money trap is when the world is awash with liquidity, but you are worrying whether a specific institution or market sector will suffer a sudden – and potentially catastrophic – liquidity problem.
The money trap is when central bankers of a developed economy feel impelled to expand credit enormously, but fear privately that the longer-term results may be catastrophic.
The money trap is when financial regulators feel compelled to tighten regulations so much that lending and innovation are crippled – but have no alternative.
The money trap is in effect when bankers feel compelled to enter into highly risky bets – read JPM – even when they know their actions might jeopardise their long-term viability and even survival.
The money trap is seen when a country with a payments surplus feels compelled to build up foreign exchange reserves beyond all reasonable limit – and then invests them mainly in the currency of a country it distrusts.
You know you are in a money trap when you see people doing silly things, risky things, making decisions that are against their own longer-term interests, but feel they have no alternative.
You can observe the money trap when financial regulators tell governments and the public that their new measures have made the financial system safe – while admitting privately, off the record, that they do not themselves believe this.
You know you are in the money trap when the president of a leading central bank says that both fiscal and monetary policies have reached their limits – there is nothing else he can do to get us out of recession – but governments cannot do anything either.
You see the money trap () working when you read one article after another in the media that paint a pessimistic outlook, without any solution being put forward.
You see in operation when governments of creditworthy countries – read Finland, Germany, the Netherlands – put taxpayers money into uncreditworthy countries on terms that the individual savers in their countries would never agree to voluntarily.
You know we are in when you see central banks – say, the ECB – providing long-term funding to bankers which they know will replace market financing and deter private investors from funding these banks – but see no alternative.
The is working when you observe pillars of a market economy, such as central banks, doing things that they know would make sense only in a socialist economy.
The is in full operation when you see banks paying staff – all staff, to just the top levels – at least three times more than they feel they are worth, but feel they have no alternative.