No wonder banks don’t want the various stimulus packages around the world withdrawn — the cheap money and ultra low interest rates are financing the party and no one wants to end it.

Cheap cash is underwriting the financial version of the old fairy tale about the emperor having no clothes. So far, no one of any stature has emerged to shout the fatal words, “the recovery is a lie”; although overnight the United Nations Conference on Trade and Development had a big go.

It said:

The economic winter is far from over: tumbling profits in the real economy, previous overinvestment in real estate and rising unemployment will continue to constrain private consumption and investment for the foreseeable future.

Given the weakness in macroeconomic fundamentals, an upturn in financial indicators in the first half of 2009 is more likely to signal a temporary rebound from abnormally low levels of prices of financial assets and commodities following a downward overshooting that was as irrational as the previously bullish exuberance.

They are not a reflection of strengthened macroeconomic fundamentals but of a restored “risk appetite” among financial agents. Consequently, they could be reversed at short notice, depending on the pace of recovery and financial market sentiment.

Got it in one with the phrase “a restored risk appetite among financial agents”.

That’s very close to the bone, but likely to be ignored in central banks and treasuries in major economies, because the alternative remains too terrible to contemplate: a re-run of the fraught months after Lehman Brothers collapsed a year ago (the one year anniversary is next Monday).

We’ve already seen the fiction that the world’s major banks are back being profitable: that’s merely profits traded in share, bond and commodity markets, not from lending money to customers. The customers are borrowing are at the big end of town with their eyes firmly fixed on the honey pot provided by compliant central banks.

Banks are not lending to small and medium businesses, individuals, they are cutting credit limits, raising lending restrictions (very late) and in some cases, using the crisis to strengthen their hold over financial activity (such in Australia).

Central banks are financing this situation, and will continue to do so, because they know the real story: that to start ending the cheap and plentiful supply of cash would be to raise the threat of financial stability back to levels seen a tear ago next Monday when Lehman Brothers failed and the global markets trembled on the edge of the cliff.

Nothing since then has changed the underlying suspicion in markets about the health of banks and others: just look at gold, up to nearly $US1000 an ounce after months of sleeping. The rise came two weeks before the first anniversary of the Lehman collapse. The European Central Bank continues to leave $US1 trillion of cheap money in the hands of the regions banks to lend. They have left most of it on deposit with the ECB because they can’t find customers to use it, except themselves.

The past week has seen two big takeovers revealed that tells us that the financial alchemists and spin doctors are out again, peddling their wares.

Last week it was Disney bidding $US4 billion for Marvel, overnight it was a $US16.7 billion grab for earnings and sales growth by Kraft bidding for Cadbury.

In both cases, the deals are based on a hope and a promise, and an attempt to escape an outlook of weak sales and profits growth, especially in the US economy. In both deals, the cash will come from banks, and indirectly from taxpayers and their central banks in the US, UK and Europe. Much of the money will be lent in a form that will fall inside the various bank guarantees in these regions.

It is nothing but a financial pea and thimble trick. Analysts and others emerged from hibernation to laud both deals, like a bunch of ancient gurus rediscovering their mojo. “Great deal guys,” sang analysts on a teleconference for the Disney/Marvel deal.

No mention of the debt burden in the Kraft deal (Kraft already has $US15 billion in debt from previous deals) and a blinkered view of growth. Not a mention of the reality of life in the US economy where around one in nine Americans are on food stamps and unemployment is continuing to rise, with home foreclosures still growing.

Consumers in the US, Germany, France, the UK and other major markets are abandoning brands, even for food and shopping down to house brands (as Woolworths and Coles are encouraging here) and what’s called ‘hard’ discounters like Aldi.

The reality is that the world economy is not in a recovery mode, as described by most eager to please economists. Just as there are “technical” and real recessions, there are “technical” and real recoveries: we have just been through a very real global recession (except in Australia, China, Indonesia and a few other countries in the developing world).

Apart from Australia, China, Indonesia and those smaller economies, the rest of the world is experiencing a “technical” recovery whereby output rises from very depressed levels in response to demand stimulated by the various spending packages and interest rate cuts.