Step Back and Look Around

Imagine that it is February 7, 1996. You want to invest your money so as to become a gazillionaire in 10 years time. Fortunately, you have a crystal ball and you are able to see into the future but you can only see what is in the news today (February 7, 2006). Would you still bet on a soft landing in real estate?

Imagine that a decade ago, you had had a crystal ball and could have read today’s news -- unspun and uncommented on. The first story is about Iran being at odds with the West over its nuclear programme. The president of Iran, you discover, would like to wipe Israel off the map, as would the new ruling Palestinian party, Hamas.

The next story is about growing concern in the US over the number of military casualties in Afghanistan and Iraq: two countries that neighbour Iran. As a switched-on reader, you wonder what all this is doing to the price of oil. Turning to the financial pages, you find out. Oil prices are no longer $20 a barrel, but touching $70, with expectations that they may go higher.

Staying with the business pages, you find that Alan Greenspan, the grand old man of the Federal Reserve, is about to retire. He will mark his departure by raising US short-term interest rates for the 14th consecutive meeting.

Greenspan, the report says, cut interest rates to 1% in the wake of the terrorist attacks in September 2001 and cheap money has pumped up the US property market, allowing homeowners to borrow money against the rising price of their main asset. The US is now running a current-account deficit of 6% and rising, the cost of military action and clearing up an immense natural disaster blamed on climate change has been to push the budget deficit to 3,5% of the gross domestic product and the savings rate has fallen to zero. You read the figures again because you can’t believe they are true. They are.

What does this mean for the dollar? Surely, you think, it must be dropping like a stone. It isn’t, because, as you discover, central banks in Asia are buying greenbacks in huge quantities so they can keep their own currencies at artificially low levels in order to keep enjoying export-led growth. The ability of American consumers to continue living beyond their means, you find, is now dependent on the actions of the communists still in power in Beijing.

A couple of other stories catch your eye. There is concern about something called avian flu which, according to the World Economic Forum, has the potential -- small, admittedly -- to turn into the 21st-century equivalent of the Black Death. And Russia is playing hardball with its neighbours over gas supplies.

What’s your response? Yes, there’s a bit of encouraging news from Germany and reports that Japan may have, at last, turned the corner after more than a decade in the doldrums. But that’s not what leaps off the page. The world of 2006, seen from the perspective of 10 years ago, has a profoundly unbalanced economy, high energy prices and a volatile Middle East. It is threatened by climate change, terrorism and a pandemic.

Perhaps you would be sanguine about all this. Perhaps, though, you would be worried sick that any one of these risks could set off a chain reaction that would make 2006 a year to forget. One thing is for sure. You wouldn’t bet too much money on a soft landing. And rightly so.

In addition to the above, you would be seeing that the stock market seems to be realizing that the housing bubble is busting as the stocks of major house builders continue their sell off, declining interest in US treasuries by foreign central bankers, there are more tales of people selling their insanely over-priced houses at a loss, people resorting to using good luck charms to sell their houses, questions over a new Fed chief and the real state of economic affairs in our Union, etc.