As Nouriel Roubini wrote in an insightful article in the Financial Times, coronavirus can be the spark that – along with many others and long-ignored challenges – could start the avalanche.
We have long been part of the largest monetary policy experiment in history. With central banks increasingly trying to stimulate the economy, we are experiencing one of the most paradoxical and dangerous phenomena I have experienced in my time working with the financial markets: negative interest rates.
On the surface, the situation can look promising. Markets have been rallying the past years and pension savers and others with investments have received good returns. At the same time, low interest rates have benefited the people who are in the housing market and have access to lending.
But we need a discussion on the larger perspectives.
The risk build-up is huge. Negative interest rates change capital flows and increase risk. In some countries you pay to hold savings and get paid to borrow. It turns natural, healthy and rational incentives into something dangerous punishing optimal behaviour and rewarding excessive risk taking.
What do bank clients do with savings when their cash is worth 0.7 per cent less every year, plus inflation (which is the case in Denmark)? Many people buy apartments, houses, stocks and bonds, all of which have seen a historically long bull market.
Many people buy ever more expensive housing – which, incidentally, they might then find difficult to service when the economy turns – and which in turn pushes prices up and makes the housing market inaccessible to many. That has massive social and societal consequences.
Of course, many also turn to investment products, which have produced a good return historically. That has a tendency to become self-reinforcing – for a while at least. But the money goes into rising markets that are not necessarily supported by growth and productivity. In fact, the phenomenon is depressingly called TINA – “there is no alternative”.
What happens the day confidence in this “Ponzi scheme” cracks? What happens if investors someday want to get out of liabilities where they have actually lent out their money for 30 years with virtually no yield? What if the market realises that it might be a bad idea to lend money essentially free of charge to people who might not pay back?
The good time in capital markets must come to an end at some point. And that’s going to hurt. There’s an expression in financial markets – “you take the long staircase up, but the fast lift down”. We can look to Japan to see an example of how debt-financed growth can collapse quickly and be difficult to recover from. In fact the Japanese market, which peaked at the beginning of 1990, today is only worth approximately half of its peak. A stark reminder that it is no law of nature that good times continue. In the 80s and beginning of the 90s many thought Japan was on path of outgrowing all other nations. That’s not how it went.
When things have been going well for a few years you tend to forget how quickly the mood can change. At Saxo Bank we try to discuss with clients and partners how best to navigate this complicated world. Risk management is now more important than ever, both for individuals, companies, including banks, but also for nation states. It requires understanding of underlying mechanisms of the market and how to get protection and manage your risk in the market. Risk management deserves far more focus than it gets today.
This is the time for societies to come together and make bold long-term decisions to strengthen our productivity and support growth.
Growth is a necessity for developing the world and finding technological solutions to our many challenges. Reforms must be designed to create win-win between citizens, companies and societies, and to ensure competitiveness in a world that is constantly evolving and improving. It requires sound management, efficiency and modern technology in all areas, as well as the right incentives. This should be on the top of all political agendas, regardless of party colour and political leanings.
In recent years, the global economy has been kept afloat by irresponsibly easy monetary policy, and many politicians have grown accustomed to sitting back while central banks prop up the economy. That will change soon. When the mood turns, the need for bold and ambitious politicians will become clear to everyone.
Kim Fournais, chief executive, Saxo Bank
