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The Market-Based Truth

The IMF, OECD, and the World Bank have published their mid-year macroeconomic update. When merging the titles of the three reports, I obtained ‘A rocky recovery through a long unwinding road exposed to financial risks.’ The tone is set.

Subjecting the global economy to fast-rising interest rates to tame inflation has been a terrific mood killer. Rising credit costs associated with high debt levels in private and public spheres have been driving financial insecurity and instability, inevitably impacting decision-making and economic activity. It is not more complicated than that.

As a result, the world is set to experience an episode of stagflation with a policy-induced macro slowdown in the second half of the year. In 2023, GDP growth is expected to be about 2.5-3.0%, followed by about 3% in 2024. In both cases, global economic growth would be below-trend.

Notwithstanding the hyperbolic tone used by the three venerable institutions, the expected slowdown can only qualify as muted. From a pure macro perspective, there is no anticipated drama.

As reported in A Rare Consensuslast year, the cure to economic growth lies in boosting the output potential via supply-side economics. But, while demand-side stimulation is politically cheap (independent central banks, pork barrel fiscal policy), supply-side economics is politically charged.

Besides, the traditionally winning, neoliberal themes of ‘less regulation,’ ‘more market,‘more global trade,’ and ‘less tax’ no longer resonate with political constituencies. In a post-neoliberal world, the approach to economic management will likely entail highly targeted fiscal policies, including through industrial policies, and bilateral trade deals. As someone born a capitalist with a deep distrust of governments, their anticipated growing role in the economy is ominous.

Under these new circumstances, economists should not only master consumer psychology but also (geo)political sciences to be able to credibly forecast economic performance. That task is just impossible, given that politicians tend to act randomly, as demonstrated during the COVID crisis.

With economic forecasts challenged on multiple fronts, whom to turn to with a view to gaining an informative, unbiased perspective on financial and economic trends?

To the financial markets. While markets are far from being always right since subject to their own emotional cycle, they have a unique ability to account for an infinite number of perspectives and assumptions and translate them into simple indices with a powerful objective (assessing fair value) and no hidden agenda. Financial markets are true truth-seekers.

Thinking of it, when I was a kid, mainstream TV newscasts would end with an update on the stock market’s performance. Why has this disappeared from so many national channels? Making room for financial market news on national TV channels would bring citizens a rare piece of valuable news.

To illustrate the point, no one will be able to better assess the likely implications of the extraordinary weekend events in Russia for the world economy than the financial markets.

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