A situation where, the pair explain, “the conviction grows that the main outcome of unconventional monetary policy has been the inflation of assets not economies, that any transmission mechanism to the real economy has been feeble in its operation, and that monetary policy itself cannot carry the day.”
Baillie and Russell are firmly in the camp arguing for the second outcome, but recognise that a policy shift of the magnitude needed to bring fiscal policy to the table will take time.
And, it is a problem exacerbated by the fact that, as they point out: “Much of the push for more active fiscal policy presently comes either from those not holding the levers of power, such as the IMF, or from opposition politicians.”
The pair’s concern is shared by BlackRock chairman and chief executive, Larry Fink who highlighted the potentially dangerous financial and economic consequences of recent central bank action in the asset manager’s latest annual report.
Quoting Bloomberg data, Fink pointed out that average yields on more than $1trn (£704.9bn, €876.5bn) of German debt have been held below zero for a record stretch, and more than two-thirds of Japanese government debt has a negative yield.
He too was clear to put the blame squarely on governments rather than just central banks, who he says are “being asked to solve economic problems without the help of coherent (and in the case of Europe, cross-border) fiscal policies”.
“These and other risks create a level of fragility in the global economy that we have not seen since the lead-up to the financial crisis. While there are some positive indicators, like sustained, albeit modest, growth in Europe and the United States, and the probability for ongoing recovery remains high, the tail risk if that recovery falters has profound and far reaching consequences.”
All of which leaves investors vacillating between the hope that the muddle-through normalisation will actually pan out, and the fear of what will happen if it doesn’t. For the ones still smiling the smile seems pretty pained and those that aren’t aren’t really sure exactly which worry to focus on. And, if it is taken for granted that markets hate uncertainty, it is clear that the current state of affairs cannot carry on indefinitely.
