Correction or crash, it's going to get bumpy either way
Published 13/01/2016 | 02:30
The benign view is that the losses suffered on the financial markets since the start of the year are the birth pains of a restored economic order.
According to that relatively happy scenario, the price of all kinds of financial assets - bonds, shares, commodities - have became bloated beyond all reason by the cheap cash pumped out by first the United States Federal Reserve and Bank of England, and now the European Central Bank.
So called quantitative easing (QE) flooded the banks, and through them the financial markets, with cheap cash over the past five years.
The problem was that most of that time little of it made its way to the wider economy.
Imagine the markets after the crash are body builders who never left the gym. With central banks pumping them up with cheap protein they became stronger and stronger without ever taking a real risk or using their power to lift something useful.
The disconnect between the recovery on Wall Street versus Main Street is a mainstay of economic discourse in the US. Here, we've all seen how first the State and then the banks were able to borrow on the markets at extraordinarily cheap rates over the past two years, while households and most businesses were hammered on the price paid for loans - when they could get credit at all.
So sticking with the benign scenario, that trend finally changed last year, starting in the US.
Job numbers and real growth picked up, banks started lending to real business again - because the returns from speculating on bonds dried up and the US Fed began the slow process of cutting financial markets off from cheap cash by raising interest rates.
As a result, markets are screaming for their QE fix not to be taken away - even if, ultimately, the volatility and losses being endured on the markets are part of the transition back to normality.
It's one view, and with the US and even Europe showing signs of growth it may well be valid.
But there is another view, stated with brutal clarity by RBS yesterday. In that malign scenario you get to keep the volatility - most analysts think everything from currencies to oil prices to shares will swing dramatically up and down this year as investors struggle to correctly price risk. But there is the added gloom around the so-called real - or underlying - economy. China is at the heart of the malign scenario. Its economy is slowing and the response appears to be to grab market share by devaluing its currency.
That makes Chinese goods cheaper - great for factories there, but bad for global earnings, bad for Western corporations, bad for credit and bad for producers of oil and other commodities.
Ultimately, it might not matter which view stacks up. If enough people believe we're heading for a crash it becomes self-fulfilling and we'll get there regardless.