Alive and unwell: the bubble economy

It misses the fact that the bubble, far from having deflated, is still with us. The rapid rise of global stockmarkets in the late 1990s should be seen as a financial bubble that just happened to be concentrated in the technology sector. It followed a pattern that pre-dated the TMT boom and has continued subsequently. Essentially, there is a huge amount of surplus liquidity in the world. Capital that cannot be invested productively within firms tends to shift from one asset class to another in search of strong returns. If one type of asset experiences problems, it can quickly switch to others.

Comments on the TMT bubble tend to forget that an Asian financial boom preceded it. When Asian markets suffered a currency crisis in 1997, a surge of speculative capital was diverted to Nasdaq stocks. The market fixation switched from Asian emerging markets to technology companies. Nor did surplus liquidity disappear with the falling stockmarkets of 2000-2002: it simply shifted to other areas. It is not by chance that the start of the latest house price boom in Britain coincided with falling share prices. Globally, surplus liquidity has also helped push down bond yields to exceptionally low levels.

The main source of this liquidity is in the relatively atrophied economic environment. In an economy that lacks dynamism, it is often easier to make a return from speculative activities than productive investment. All the talk of rapid economic growth does not add up. According to figures by Angus Maddison, a world authority on the subject, global GDP growth per head averaged only 1.4% a year from 1973-2001 compared with 2.9% from 1950-73.

Two other factors have contributed to the surge in liquidity. In today’s risk-averse climate, many companies are fearful of investing productively – preferring to manipulate their balance sheets or return cash to investors. In addition, low interest rates exacerbate the tendency towards bubbles. Markets may no longer be fixated by the latest technological developments, as they were five years ago, but the bubble economy lives on.