September 2016


  • More and more, decision-makers and market participants are coming to the realization that ultra-low interest rates reflect profound structural issues – most notably global ageing, falling productivity rates and rising inequalities – as much as central banks’ extraordinarily accommodative policies. Going forward, this means that the trend of ever-rising bond and equity prices provoked by the market dependency on monetary policy won’t be sustained. As investors acknowledge that central banks’ acquisition of assets boost asset prices without boosting activity in the real economy, the dream combination of (1) high returns and (2) low volatility will come to an end.
  • During The Monthly Barometer’s annual gathering that just took place, the words “paradigm shift” came up over and over again. The world is indeed in a state of flux – changing radically, ubiquitously and very fast. Accordingly, decision-makers have to rethink the way they do things. For example, with respect to the point above, they have to recognize that central banks will not significantly tighten up because they can’t: the current policies cannot be reversed without inflicting terminal damage to the global economy. This means that the ball is now in the governments’ court: expansionary fiscal policies (for countries that can afford them) and massive infrastructure investment are in the offing.
  • As the effectiveness of unconventional monetary policies dwindles, the fear that “Japanification” will
    engulf the Western world is growing, exacerbated by the following observations: almost four years after Abe’s nomination as PM and an extremely aggressive monetary stance, the inflation target remains out of reach, the economy is smaller, consumer spending hasn’t taken off, government debt has risen from 238% to 248% of GDP, and the BoJ has a rising credibility problem. But there is a BUT. When measured in GDP per worker terms, Japan has had the highest economic growth of all G7 countries over the past 15 years, and its GDP per capita has grown at the same rate as the US. The lesson is this: it’s hard for an economy to grow rapidly when the population shrinks. Unless robots and AI start replacing vanishing workers, Japan’s fate awaits all other ageing countries.

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