Since 2009, as policy makers have sought to return the global economy to normal, “stability” has usually been their byword. Unfortunately, their actions have only created a false calm — a “stable instability,” to coin a paradoxical phrase. Although a repeat of the financial crisis has so far been avoided, this relative tranquility has had the effect of derailing normal market mechanisms, thereby masking a worrisome accumulation of risks.
Stable instability creates the illusion of normality, obscuring dangers hidden behind the apparently stationary and familiar. It’s analogous to a person who shows no obvious symptoms of an as-yet-undetected terminal disease. In this state, the same arguments can be used to rationalize contradictory events and different arguments used to reconcile identical facts.
Today, optimists argue that economic prospects are sound, with globally synchronized growth, low inflation, strong labor markets and buoyant asset prices. They ignore low labor-force participation rates, flexible definitions of employment, the poor quality of new jobs created, low wage growth, limited productivity growth, weak capital investment, and continued imbalances in global trade and savings.
(Related: On the Third Hand: Clawblind)
They’re sanguine about continued fiscal deficits, accommodative monetary policy and perpetually increasing debt, while seeing the normalization of interest rates and the withdrawal of central bank liquidity as manageable. They’re unconcerned about widening inequality, resistance to immigration, rising geopolitical tensions and the risk of trade wars.
Pessimists reach diametrically different conclusions from the same facts. But they forget that a major fall in asset prices or a substantial slowdown in economic activity is unlikely to be tolerated. Policy makers will reduce interest rates (potentially into deep negative territory), resume asset purchases and increase government spending to preserve the status quo.
Irrespective of whether the optimists or pessimists are correct, the fact that they can interpret the same metrics so differently suggests a longer-term worry — that stable instability could destroy the underlying market mechanism.
By boosting asset prices, policy makers aimed to buttress elevated debt levels and, via the wealth effect, increase confidence, consumption and investment. But rising values of financial instruments representing claims on productive assets don’t create real purchasing power unless converted into cash or real enterprises producing earnings. Any gain for a seller of such assets is contingent on somebody else buying and holding the security, frequently with borrowed money. The economy itself does not benefit from the transfer.