Summer entropy
The particularly disastrous stockmarket summer rapidly wiped out the relative serenity of economic forecasters during H1. After two months of decline, one question is on everyone’s mind: what is the likelihood of a possible recession? 30%, 50%? And one factor is sure: the likelihood increases every time the CAC 40 declines.
As one pale-faced holiday-maker stated: “Its the financiers that carry the world now”, but the question is “who carries the financiers?” There is no point in looking for the answer. The financiers, or rather, the markets, carry themselves along, practicing self-prediction at will.
A major Anglo-US company recently quantified the negative impact on GDP of the decline on equity markets estimating that the 15% lost on the S&P since mid-July could cost US growth 0.7 points! Imperturbably, the strategist then published a reduced growth forecast, which in turn was quick to prompt a further decline on equity markets, thereby triggering the downward spiral. This case is not new but the process has clearly gained momentum recently.
Since July, French financial daily, Le Monde, has started an economic fiction in its columns. At the same time, stress on European debt has expanded and the fiction started to resemble a banal article in a financial newspaper. One of the episodes underscored the difficulties encountered by Société Générale in refinancing itself. We already know what happened next. A few days later, a UK newspaper quoting the news somewhat hastily, triggered a mad day of trading during which the rench bank’s share price plummeted 20%. The UK journalists apologised (also defending themselves by taking the news from a simple summer serial), but even so, the damage was done and the refinancing of French banks became the issue of the week. Self-prediction strikes again!
The optimists would say that the “Panurge” financiers, however many there are, can quickly change direction and turn a much-heralded recession into a simple slowdown. The pessimists would say that the very essence of sell-fulfilling prophecies is exactly that they materialise. However, the optimists and pessimists would probably agree on one point: a lack of authority is also responsible for creating irrational behaviour.
The shilly-shallying between Republicans and Democrats and the cacophony of speeches in Europe early this summer have provided a breeding ground for all this fear. A clear bout of financial disorder, or “stockmarket entropy” as physicists would say.
On the subject of entropy, science has a definitive answer: while it can increase without effort, a huge amount of energy is required to decrease it. In the present case, a lot of financial efforts are required and the first measures announced to reduce European deficits are only in the teething stages. This crisis should have at least one virtue, namely that it should make possible the budgetary adjustments that have been needed for so long.
So let’s clearly side with the optimists!
And let us quote the memories of Jean Monnet* again: “Man only accepts change when necessary and only sees the need during a crisis”. Today, the need is identified and is beginning to be addressed. The remedy is bitter, but a cure is in sight.
Didier LE MENESTREL
with the collaboration of Marc CRAQUELIN
* French politician (1888-1979) – Mémoires, 1976, Editions Fayard.