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GLOBAL FINANCIAL STABILITY: CHOPPIER WATERS AHEAD?


Financial markets have been fixated for most of the past two years on trade tensions, above all those between the US and China, and the tortured process of the UK’s decision to leave the EU, a.k.a. Brexit.


Financial markets have been fixated for most of the past two years on trade tensions, above all those between the US and China, and the tortured process of the UK’s decision to leave the EU, a.k.a. Brexit. There is little doubt that both have taken their toll on the global economy, and in turn prompted the ‘volte face’ in terms of major central banks’ monetary policy stance from actually tightening policy (Fed and BoC) or thinking about less accommodation (Europe, Japan) up until the end of 2018, to a round of renewed policy easing currently. It has to be added that while the post-GFC central bank dictum of ‘do something’ (or Draghi’s whatever it takes’) which has prevailed in the face of economic headwinds continues to inform market policy expectations, the sharp divisions in policymakers’ opinions are all too visible at the ECB, Fed and BoJ, and underline concerns about the ‘law of diminishing returns’.


But there is also a realization that, leaving aside the issue of the side effects of zero or negative rates, monetary policy is an ineffective tool in the face of trade tensions or a trade war. It also can do little to mitigate the impact of major structural shifts in key industries (e.g. autos and telecoms/tech at the current juncture, energy in the longer run), and most importantly needs help from governments in terms of fiscal policy measures and structural reforms, most abundantly evident in the Eurozone. By extension, the myth of central bank supremacy in the face of any challenge, which has been allowed to flourish in financial markets since the GFC, has in no small part been due to the all too frequent tendency for financial markets to indulge in ‘wishful seeing’ and ‘wilful blindness’.


In a certain sense, it should come as little surprise that, after such a prolonged period of central bank largesse, financial repression and accompanying capital misallocation, along with zealous regulation of the banking sector, strains are starting to appear in financial markets. But perhaps the more pertinent point is that the divergence between the performance of financial assets in recent years, and the lived reality of the so-called ‘real economy’ is another element that has fed the fire of rising social tensions. The current wave of popular protests around the world, from Santiago through Barcelona, Paris, Beirut to Hong Kong, suggests that the myths and mirages of the current recovery as seen through the prism of the prices of financial assets are foundering on ‘straws that break the camel’s back’. These are tipping points amongst a broad swathe of long-standing popular complaints and grievances about inequality, corruption and oppression, in other words variations on the broader themes of populism and anti-globalization. As with the Arab Spring, the escalation from what one might term ‘mutterings’ to outright disorder and violent protest is frequently sudden and all too often exponential.


THE CURRENT WAVE OF POPULAR PROTESTS AROUND THE WORLD, FROM SANTIAGO THROUGH BARCELONA, PARIS, BEIRUT TO HONG KONG, SUGGESTS THAT THE MYTHS AND MIRAGES OF THE CURRENT RECOVERY AS SEEN THROUGH THE PRISM OF THE PRICES OF FINANCIAL ASSETS ARE FOUNDERING ON ‘STRAWS THAT BREAK THE CAMEL’S BACK’.


4 | ADMISI - The Ghost In The Machine | November/December 2019


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