10.11.2011
By Terry Flanagan

Markets Returns to ‘Old Normal’

Higher correlation, lower inflation, and a lack of an international stronghold regime are imminent for investors, said central banker.

Increasingly volatile geo politics will spur higher correlation amongst asset classes, according to Adam Posen, monetary policy committee member for the Bank of England (BOE).

“There is going to be more geopolitical uncertainty; it’s not calamitous, it’s just reality,” Posen said, citing that the Eurozone sovereign debt crisis and weak economy U.S. are among events to continue.

As such, real adjustments, over monetary policy nominal shocks to the system will be set in motion by central banks.

Posen defended the common assumption that central bankers primarily “inflate away debt” through various policy-induced programs. Quantitative easing in the U.S. is a recent example.

“We’re not inflating away debt,” Posen said. “Governments have an incentive to do that because that want to stay in power, but central banks, over the long-run, can’t pursue policies unsupported by the public.”

Yet, Posen acknowledged that an era of low inflation, and high real volatility, and more “idiosyncratic geo political shocks” are imminent upon the global economy; much akin to the macroeconomic environment of the late 19th century.

Above all else, the biggest change for the financial markets will be a lack of a clear hegemon.

“We’re moving to a world where basic economic integration will continue but there will be more ad hoc national interests, and national policies,” Posen said, noting close ties in the Eurozone as a modern-day example of economic intertwinement.

“Some public goods will be less divided,” Posen said, against citing that imminent change is not a foreboding view of the markets to come. “But, one person’s view of individual country’s financial repression is another person’s revelation.”

As a result of a more interconnected global economy, Posen also acknowledged the possibility of multiple reserve currencies embedded in the next ten to fifteen years of monetary policy.

“It’s entirely possible for many sovereigns to have more than one reserve currency,” Posen said.

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