Instead of facing up to the unpleasant reality of the misallocation of capital leading up to the global financial crisis (GFC), central banks opted for global quantitative easing (QE) – printing more money and using it to buy assets. This has, arguably, perpetuated the addiction to debt via low rates and an abundance of liquidity. Further, the collateral for the debt remains based largely upon asset values rather than on an ability to pay, much the same principle as that which characterised the housing bubble in the period leading up to the GFC. The result of all this, is global debt levels continuing to rise.
It remains an open question whether it is actually possible to withdraw the previous ten years of stimulus without causing the next crisis. We are about to find out whether QE is the de facto new policy tool of central banks to be used in the future. If, however, QT exposes the unsustainable nature of this debt addiction, we will realise we have learnt nothing.
We believe this is the more likely outcome, and, already this year, an entire opera of canaries has begun to sing in the proverbial coalmine, be it in the form of the difficult market conditions facing many low-volatility funds or the economic instability seen in Turkey and Argentina today.
It is possible that we may never see another GFC in our lifetimes, but while we still have a financial system with record levels of debt, negative interest rates, unwinding QE and sky-high populism in many countries, inherent instability will remain the enduring legacy of the GFC.
Rajesh Shant, portfolio manager, Global Equity Team. Newton Investment Management – a BNY Mellon company