Markets may look calm, but the foundations of global finance are anything but secure. Rising government debt, fragile non-bank financial intermediaries, and speculative assets like stablecoins are all part of a system that appears steady only because investors are choosing not to look too closely.
That's the opinion reflected in the IMF's latest Global Financial Stability Report, issued yesterday, which warns that asset prices are once again stretched far beyond fundamentals. At the same time, banks and shadow banks have become dangerously entangled. In addition, a sudden drop in asset values or rise in interest rates could easily set off a chain reaction, whether from balance-sheet losses in banks to liquidity crises in investment funds.
In short, the IMF shares my gloom about the risk of a crash within the economy. They obviously believe that the global financial system remains exposed to the same feedback loops that triggered past crises. The difference is that this time, the risks are dispersed across an opaque web of private funds and unregulated markets, which might make them much harder to manage when the crash happens.
The IMF's prescription of greater prudence, stricter regulation, and fiscal restraint, however, barely scratches the surface of what is needed. The deeper question is whether we can continue to run a world economy on speculative confidence and private credit creation when both are visibly eroding. The calm, as ever, may be just before the next storm, and the IMF clearly thinks it may not be long in coming, as I have been saying for a while, but from which fact I take little comfort.
You have been warned.
Worry. That is the official line to take now.
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There is now what I think is a quite infamous interview with Dominique Strauss Khan when he was MD of the IMF when he talks of meeting with the heads of the largest banks after the 2008 crash.
The story was of a moment where the bank’s top brass admitted that they had been too greedy according to Strauss-Khan anyway. He was later to pay for his candour. You can see the interview in the documentary ‘ Inside Job’.
What was it that Milan Kundera said: ‘The struggle of man against power is the struggle of memory against forgetting.’
Given what Labour have been up to in the pursuit of growth, I don’t see too much reflection, do you?
You’re right to say it’s time to worry, and the Chancellor’s latest bright idea only makes that feeling stronger.
Apparently, she’s toying with cutting the tax allowance for cash ISAs, so that more savings are channelled into investment ISAs. That means encouraging ordinary people to take their savings out of safe, interest-bearing accounts and put them into the stock market, just when the IMF is warning that asset prices are stretched, leverage is high, and the whole financial system looks fragile.
It’s a perverse kind of logic. When confidence is wobbling, you don’t drag the cautious into taking risks they don’t understand, just to make the markets look livelier. Most of the money in “investment ISAs” won’t actually fund new businesses anyway. It’ll just chase existing shares around the secondary market, inflating prices further and lining the pockets of fund managers. And I suspect that’s where the pressure for change is really coming from.
If the government really wants to boost productive investment, it could do so safely, by expanding public investment, creating a proper national investment bank, or issuing green and infrastructure bonds that give savers a solid, guaranteed return. But slashing cash ISA protection amounts to shifting risk from the financial sector onto ordinary households.
In short, we’re being asked to prop up a fragile system with our own savings, at exactly the moment when the system itself looks least trustworthy. That’s not economic strategy; it’s desperation.
Much to agree with
Good comment Cliff C.
To push individual savers into risky investment is wicked and destructive. As you & RJM point out, govt savings schemes could be of use to economy and savers.
Yup, I’ve just been reading about Reeves bright idea in the FT. Even some of the BTL commenters are saying it’s ridiculous.
Does she not understand that most ‘investment’ in equities is in the secondary market and the companies whose shares one buys don’t see a penny of your money?
My modest saving are staying put in cash ISA and government bonds.
November’s budget is going to be a disaster I feel.
What is a BTL commentator?
Below The Line
Any Independent Financial Advisers out there who could ethically give “best advice/know your client” advice for an ordinary unsophisticated domestic saver to switch their “rainy day” savings from a cash ISA to an investment ISA on the basis of this proposed change?
Yet again government is offering ordinary people the chance to lose our shirts while government shrug their shoulders, and people see their hard earned savings evaporate into thin air in a market we do not understand.
Will these investment ISAs Reeves wants us to move to, be investing in newly issued shares of startups and fundraising share issues of expanding companies, or secondly, in “pre-speculated” shares?
If the latter, how will that help growth?
If the former, doesn’t that massively increase the risk way beyond what an ordinary person’s “rainy day” fund should be contemplating?
Prediction, no journalist will ask any MP or think-tank pundit these questions.
It is inexplicable to me that she is advocating this especially at this particular juncture. You would think she would be more cautious out of self interest alone. Just how popular does she think a Labour government would be which presided over a financial crash in which many small savers lost their shirts as a result of following her advice to invest in the stock market? She would make Liz Truss look like a financial genius.
Worried I am, but I can’t do anything about this. Only understand it. A march from Jarrow today would likely be declared unlawful. An economy that provides decent jobs, sustains us and the planet is surely not beyond our capabilities. You are helping us to see into the citadel if world finance, but I’m not sure those within see us, and their supporters without don’t want to regulate the power in there.
As Charles Prince famously said “While the music plays, we have to dance”.
Right now, the world is chasing Return ON capital, soon it will be worried by Return OF capital. Timing is (always) the key and virtually impossible to get right….. but in the meantime if one relies on savings to live (as I do) it is time to hunker down. Forget FOMO.
Agreed
I was at a conference yesterday and it was enlightening to hear what various product providers had to say about the state of the economy and what people are actually doing with their money – most of the latter came from the other IFA’s in attendance. There was the usual guff from ‘investment houses’ trying to persuade us that we should look at tax-advantaged products (VCT/EIS) and that ‘infrastructure investing’ is safe.
Much more interestingly, two companies – large life offices – had a completely different take on matters by telling us what products are actually selling at the moment. First up, there seems to be a concerted ‘de-risking’ going on with people converting their defined contribution pension pots into a tax-free lump sum and a guaranteed income for life in the form of an annuity – that’s certainly my experience. There has also been a noticeable switch away from US equities (tech, basically) into ‘boring’ UK Equity Income Funds (consumer staples, basically) – again, that is my experience, too. Much of this caution is being driven by the end consumer, not the investment companies, and other IFAs I spoke to also noted the fear that clients have about inflation and market falls.
One firm – Canada Life – has even seen an increase in people using their own money to buy an annuity (these insurance contracts have an unusual tax regime, meaning the tax take is very low compared to a pension annuity which is taxed under PAYE) – again, I have seen some interest here, too, personally.
In sum, the ‘investment houses’ are concerned about money ( and their fees) walking out of the door as their customer base ages, whereas traditional, boring, ‘safe’ things like annuities are regaining their place in client portfolios.
Thank you, and appreciated. Very useful to know.
Certainly chimes with what I am doing and quite a few friends, too.
Is now the right time to move pension savings into government bonds and/or gold?
I cannot advise on such issues