Mohamed, your new book “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse” has just been published – can you summarize it very quickly?
The current path that the global economy and markets are on is subject to ever growing stress. It has excessively decoupled asset prices from the underlying fundamentals, distorted the allocation of resources. It has also exposed central banks to huge political risk, and aggravated the inequality trifecta of income, wealth and opportunity. All of this is fueling the growth of anti-establishment and non-traditional political movements on both sides of the Atlantic, as well as accentuating geo-political tensions.
The adventure and misadventure of central banks, the world’s most influential policymakers in recent years, provide a unique perspective on this unusual phase in our economic history.
So which situation do central banks face?
Having inadvertently allowed and enabled irresponsible risk taking, including the migration of financial activities to unregulated areas, central banks are today forced into a “whatever it takes” crisis management mode. Resorting to bold measures, they helped the global economy avert a costly multi-year depression. But, lacking the support of other policymaking entities with tools better suited for the tasks at hand, their “only game in town” reality forced them to venture ever deeper into experimental policy terrains, with all the unintended consequences and collateral damage that this threatens.
We have arrived at a “T junction.” Within the next few years, the current path will give way to one of two starkly different outcomes. One promises the return of genuine and inclusive growth, and allowing the global economy to prosper, getting rid of excessive indebtedness and help heal a partially dysfunctional political process. The other involves economic stagnation, beggar-thy-neighbor policies, and the return of financial instability – all of which would aggravate political polarization.
And which direction is the more probable one?
There simply isn’t enough data right now to specify with a sufficient degree of confidence which of the two outcomes will prevail. Moreover, there is nothing pre-destined about what transpires. Much will depend on the actions of governments, companies and households.
Rather than bet prematurely on one of the two outcomes, and instead of being paralyzed by the uncertainty, there are steps that we can all take now to ensure that we are better placed handle what eventually transpires. They speak to building the trio of resilience, agility and optionality.