May is a notoriously bad month for share prices. Every year, this column pulls out the same old expression, sell in May and go away. And there is no shortage of economists who reckon the latest upheavals are little more than our annual springtime panic.

Ian Harwood, who is the chief economist at Evolution Securities said: “Corporate profits are improving, and companies have lots of cash. Both theory and experience suggests that these conditions can be expected to lead to higher investment spending and employment. And, crucially, this seems to be exactly what is beginning to happen.” He added that he didn’t think that even the fiscal tightening would be enough to delay the recovery.

Goldman Sachs’s talismanic chief economist Jim O’Neill said: “Our main conclusion is that, while it is true that European Monetary Union is undergoing a severe crisis, especially following the co-ordinated policy response, this is not likely to be a source of global financial market contagion, nor is it likely to be the source of a major renewed European economic downturn.”

So far the FTSE 100 is down 11 per cent this month. It is down 15 per cent from 20 April, which saw the year high, and 8.8 per cent since 1 January.

These are steep falls, but the drops are not high enough yet to justify the description of ‘market crash’. The falls we have seen so far could just about fall into the category one might refer to as ‘seasonal blip’. But then again, only just. If falls continue, then we move into alarming territory.

The comment made by Ian Harwood about rising corporate profits seems odd. As has been pointed out here on several occasions of late, corporate profits may be the problem. Companies are saving, and in the process demand is being sucked from the economy, and money is flowing into any form of government bonds which the markets see as safe.

Perversely at a time when sovereign debt is mounting across the world, the yield on UK, US and German bonds is falling. The yield on UK government ten-year bonds has dropped from 3.92 per cent on 10 May to 3.47 per cent at midnight yesterday.

This is the great irony of the sovereign debt crisis. As worries over government debt grow, markets become anxious to pump more money than ever into government debt. This backs up a point made here often enough. It is not sovereign debt that is the problem. Rather, it is market enthusiasm to lend to governments. If money stopped flowing into government bonds, and instead funded more investment and consumer spending, growth would rise and governments would not need to borrow so heavily.

This is why deflation and not inflation is the real danger. As Albert Edwards, who is a strategist at Société Générale, told the Guardian: “The US and Eurozone now stand on the edge of a deflationary precipice.”

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