Looking for Trouble...
Mark Cliffe
Visiting Professor at LIBF, Visiting Fellow at Global Systems Institute - University of Exeter, Senior Advisor at KPMG UK, Board Advisor and Project Syndicate Columnist
How politics could fuel downside risks to global markets
It is easy to find downside risks to the outlook for the global economy and markets. Worse still, a recent ING report, entitled ‘Looking For Trouble’, highlights doubts about the ability of economic policy to revive economic growth were a recession to strike. In a follow-up narrated presentation, I focus on the role that politics might play. In particular, there is potential for a damaging feedback loop between negative economic and financial market shocks and the rise of populist politics.
An important part of the feedback loop between politics and economics comes through shifts in economic policy. Populists are challenging some or all of the neo-liberal orthodoxies on fiscal restraint, monetary laxity and trade and market liberalisation.
Yet even if the mainstream politicians hold off the populist insurgency, it is worrying that policy-makers have failed to identify, or are unwilling to use, the necessary policy tools to counter a recession were it to strike. On the monetary front, doubts are growing as to how much further they could push on quantitative easing or negative interest rates. For now, mainstream politicians resist calls for more support from fiscal policy. But setbacks in the financial markets, or in the voting booths, may change this.
A significant downturn, even if milder than the ‘Great Recession’ of 2008-09, could open the door to yet another reappraisal of macro-economic policy. Politicians could revisit debt-financed public investment programmes, taking advantage of low or negative interest rates. Even ‘helicopter money’, whereby the stimulus is funded by newly-created money, could turn from theory into reality. While this may seem a long shot for 2017, more such radical moves are likely when the next downturn inevitably arrives.
Principal at MacroPacific Markets
8 年About 90% of the day to day focus of market economists is concerned with the business cycle, stabilization policy and asset price dynamics. But the economy's performance has profound impacts on income inequality and income security felt by immobile householders. In democracies their anger will eventually be felt by political leaders. So Mark's analysis, particularly thinking through how "adverse" outcomes to political events would impact markets and central bank policy is welcome. Much of the commentary I read takes on a tone that assumes that the public is basically ill informed or lacks drive to get new skills or compromise to adapt to evolving economic circumstances. There are 2 key messages arising from the populist backlash. One - the middle class and the young are saying - quite legitimately - that they don't like assuming greater levels of economic risk relative to their parents. They are likely to have larger student debts, they are finding it difficult to find work for which they have skills, while digitization and globalization has made "safe" jobs in services more contestable. Now much commentary asserts that trends such as digitization and globalization are inevitable and that people who oppose these trends are akin to Luddites. My second point is that the state is in a unique position to reduce economic risk and the public is demanding that governments become more activist - notably in health care & insurance, affordable education and ensuring adequacy of pension arrangements. In countries like the US, where politicians have historically compromised the public good to reward corporate interests, you will have greater political unrest and potential for populist backlash. The public is making a judgement that supranational governments and transnational trade agreements reduce scope for an effective policy responses. People want their nation state back.
Managing Director, Fund Banking Group at J.P. Morgan Private Bank
8 年Hopefully the probability that the Series of Unfortunate Events actually happens is quite low.