Secondly as former BIS chief Caruana noted in 2015: “Policy does not lean against the booms, but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap.” “Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent.”


Thirdly, none of those charged with regulatory reform ever sought to ask whether it was and is the leverage in the wider financial system, and by extension certain types of accompanying financial instruments where the epicentre of risk lies, and which has risen sharply, if not exponentially as a result of the combined monetary and fiscal measures that have been taken. Central banks have effectively been complicit in this, and instead being ‘in control’, they find themselves in a trap of their own making, and as guilty as governments of failing to tackle much needed reforms. Perhaps the saddest observation in recent months was that of RBA governor Lowe that the RBA cannot tighten policy if other major central banks continue to loosen financial conditions, or at least not without prompting a major and unwanted revaluation of the Australian Dollar.


Markets are increasingly aware that the aforementioned trap is a problem which central banks ‘Spaghetti principle’ policies (the act of throwing spaghetti against a wall and hoping that some of it sticks) will not solve, and indeed may serve to destabilize economies via inflation or potentially stagflation, and in the process the financial and monetary system architecture that underpins it. But what may be of greatest concern to markets is that tacitly central banks are far more concerned about how they can extricate themselves from this trap, but persist with a narrative of persisting with current policies for a very protracted period via ‘forward guidance’, even though the risks to the economic outlook are as BoE governor Bailey has said ‘increasingly two-sided’.


There would appear to be two very clearly identifiable risks, despite a still very high level of uncertainty about how the pandemic evolves, and by extension its economic consequences. The first is a near certainty, namely that the pace of recoveries diverge very sharply, necessitating unilateral decisions by governments and central banks on removing some of the fiscal and monetary support, which even in a more homogenous evolution will be tricky. The risk is primarily that with so much excess central bank liquidity and so little market liquidity, such unilateral moves prompt sharp shifts in flows between geographies and indeed asset classes. The second is around inflation, rather less due to pent-up demand, which should prove to be transitory even if perhaps alarming at certain points, and rather more because it remains unclear how much productive capacity has been permanently lost, or will take a very considerable period to rebuild; semiconductors, above all for the auto sector, are the obvious immediate example. In that respect, and on a closing note, if the fad for ESG and climate change related investing ends up cutting off finance for the hydrocarbon sector in an abrupt fashion, the risk of outsized price rises for hydrocarbons looks to be inordinately high. While the pressure to migrate to energy sources that are more climate friendly is obvious, this will take decades, and self-righteous tub- thumping and chest beating has never been the basis for any realistic and realizable plan for a major global transformative project.


Marc Ostwald E: marc.ostwald@admisi.com T: +44(0) 20 7716 8534


SYSTEMIC FINANCIAL CRISES DO NOT BECOME LESS FREQUENT OR INTENSE, PRIVATE AND PUBLIC DEBTS CONTINUE TO GROW, THE ECONOMY FAILS TO CLIMB ONTO A STRONGER SUSTAINABLE PATH, AND MONETARY AND FISCAL POLICIES RUN OUT OF AMMUNITION.


8 | ADMISI - The Ghost In The Machine | Q1 Edition 2021


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