Bernard Connolly: The next big bust looms

Investment guru Bernard Connolly foresaw the last crisis, and he sees another one on the way.

"Very, very few" economists have been vindicated by events in Greece, says John Dizard in the FT. "The one who has earned the most honour" is Bernard Connolly. He published a book in 1995 called The Rotten Heart of Europe, which said that monetary union was a misconceived mess designed to force countries into a political union. The experiment would end in tears, he claimed. Rather awkwardly, he worked in the European Commission at the time, so he was sacked and shunned.

But he was quite right. The key problem is that the southern countries are less competitive than the northern ones. Once the bubble induced by a one-off fall in interest rates burst, the south couldn't regain competitiveness by allowing its currencies to fall. It had to devalue internally, clamping down on wages and prices, which depressed demand giving rise to a vicious cycle. The way to alleviate this problem is for the rich states to subsidise the south. But without a single federal government to back the currency union as is the case in America it's not going to happen.

What's more, a so-called "transfer union" of this kind would bankrupt Germany, reckons Connolly. "It would have a bigger effect, indefinitely, than the intended Versailles treaty reparations payments." Germany should leave, he reckons. "That would minimise the financial damage from the dissolution that is ultimately inevitable."

Connolly foresaw the US crisis of 2008 too, launching a book in April that year entitled The Worst is Yet to Come. In 2003, he said the American economy was a debt-driven Ponzi scheme and interest rates would have to fall even lower in the next cycle to keep the show on the road. The next bust could now be looming. "We're getting very close to the state of the world" in 2006/2007. The "house of cards has been rebuilt" and a "puff of wind" could soon blow it over.

Recommended

The MoneyWeek Podcast with Russell Napier at the Library of Mistakes
Investment strategy

The MoneyWeek Podcast with Russell Napier at the Library of Mistakes

Merryn talks to Russell Napier about Edinburgh’s Library of Mistakes, the age of debt and financial repression, plus why he has never invested in Chin…
27 May 2022
Will the rise of ESG investing cause stagflation?
ESG investing

Will the rise of ESG investing cause stagflation?

ESG investing is booming. But it may be contributing to today’s stagflation – slower growth and higher inflation – says Tom Traill.
27 May 2022
The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
The end of the era of optimisation
Global Economy

The end of the era of optimisation

A focus on maximising returns has made economies too fragile, says Edward Chancellor.
23 May 2022

Most Popular

The world’s hottest housing markets are faltering – is the UK next?
House prices

The world’s hottest housing markets are faltering – is the UK next?

As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. The UK’s turn will come, says John Stepek. But will …
23 May 2022
The Federal Reserve wants markets to fall – here’s what that means for investors
Stockmarkets

The Federal Reserve wants markets to fall – here’s what that means for investors

The Federal Reserve’s primary mandate is to keep inflation down, and lower asset prices help with that. So, asks Dominic Frisby – just how low will st…
25 May 2022
Should you be worried about energy windfall tax proposals?
Energy

Should you be worried about energy windfall tax proposals?

Calls have been growing for a windfall tax on UK oil and gas producers. It's a popular idea, but is it a good one? And what does it mean for investors…
24 May 2022