Since the fallout of the financial crisis, we seem to be living in a disrupted world. Financial markets which are supposed to be a platform for promoting economic productivity, now largely function as speculative markets. Cash, once the safest investment and crowned as king, might be in danger due to negative interest rates and imposed laws putting deposits at risks. The common men are dismayed because their political figures, the ones responsible to make the economic pie bigger for the benefit of one and all, are enriching themselves by manipulating the system to seize a larger slice. Central Banks round the globe have tried to prop up the economy through quantitative easing but this measure has produced little results other than asset price inflation in bonds, equities and real estate. The economic metabolism of the world has changed.
Standard economics taught in every text books implied that financial system is the main engine room, from which all other parts function. In an ideal world, both market and bank based financing provide the necessary funds for industries to grow thus oiling the economic growth. Today with slower growth and high valuations of stock prices, it seems that there is a huge disconnect. Looking at stock markets performances since start of the year (S & P 500 12%, FTSE 14%, Hang Seng 8.5% in local currency and as at 23 Sep 2016), it seems that there is no threat to the world economy. Brexit was a classic bazaar in evaluating the overtones and undertones of the financial markets. The first reaction of Brexit was fear. Stock markets were thrashed violently because people were uncertain about the future. Couple of days later and realizing that the world has not fallen apart, financial markets regained its upward mojo. Financial markets are behaving like a game of snakes and ladders. The fundamental mechanism of supply and demand in the financial markets has changed.
It is a fact that round the world, central banks are using extreme measures to stimulate the sluggish economy. From billions of bond buying programs to negative interest rates, no tools have been left unturned to reboot the economy. So far the results have been disappointing. Holding interest rates close to zero year after year has made saving money or investing in interest bearing instruments fruitless. Pensioners are being forced to venture into risky investments just to generate needed yield for their survival. With a prolonged low interest regime, their hard earned money are in jeopardy. A recent study by Mckinsey and Co provided some further harsh realities on the state of low interest rate environment. Accordingly, up to 70% of households in 25 advanced economies, the equivalent of 540 to 580 million people, had their income and wages fallen in 2014 since the fallout of the financial crisis. Another tangible effect of the low interest rate environment has been the rise of debts in many regions of the world. In order to prop their economy, the credit base was so dramatically extended to unproductive sectors resulting in non-performing debt. It’s an economic environment that every actions of central banks have become a sort of perverse, never witness before.
Analysing past elections in several jurisdictions lately and the referendum on Brexit, one could argue that voters did not choose a particular political class/ideology, rather it was more than a protest vote against the previous regime. Latter was mired in corruption, bad governance and politicking. Anywhere in the world, the main job for policy makers is to know how to drive the economic car. The fundamental objective of any government is to build a strong and sustainable economy and a fair society, where there is opportunity and security for all. Unfortunately, citizens of the world has lost faith in their political class as there is breakdown in their economic advancement. A sense of economic despair hangs in the air these days as the political class is unable to deliver. Arrogance, looting, dishonest and self-centered seemed to be the new mantra of the political class. Politicians are well advised to remember that there is an impending limit to how much they can harbor their personal ambitions rather than acting as a true patriot and work towards the economic benefits of one and all.
It will be a strange next few years. Everything has changed.