According to a latest report from Deutsche Bank Research, the large-scale policy interventions that have buffered global market economic shocks for decades are coming to an end. Rising sovereign debt, elevated interest rates, and persistent inflation are weakening the traditional "safety net" of governments and central banks.
Deutsche Bank analyst Henry Allen pointed out that compared with previous crises, policymakers now face unprecedented constraints. He warned that the interventionist policy tools adopted by governments and central banks during the 2008 global financial crisis and the COVID-19 pandemic may no longer be sustainable.
Henry Allen noted that higher baseline debt-to-GDP ratios and growing interest burdens have already limited policymakers' ability to significantly expand fiscal deficits or launch large-scale quantitative easing programs during future economic downturns. This is because such measures now carry the risk of reigniting an inflation spiral, and inflation has only recently been partially brought under control.
With government balance sheets already under pressure and borrowing costs staying high, the fiscal firepower that past crisis responses relied on has been substantially diminished. Henry Allen believes that unless yields fall sharply or inflation collapses, markets should prepare for higher macroeconomic volatility, higher term premiums, and reduced reliance on rapid government bailouts.
Over the past 20 years, the so-called "monetary policy put option" has supported risk assets, and the market's future reliance on this policy backstop mechanism may decline. He stressed that the "safety net" the market has grown accustomed to is gradually breaking down, and the global economy may soon have to cope with turbulence without the buffer of large-scale policy intervention.
Henry Allen said: "If we look back over the past 40 years, we can see that the last five U.S. economic expansions all rank among the seven longest-lasting expansions since business cycle statistics began. There are multiple reasons for this, some of which reflect the economy's gradual shift away from a model based on agriculture and output dependent on factors such as weather. But preventive policy intervention also played a key role, for example by cutting interest rates to stop an economic slowdown from turning into a recession."
Henry Allen added: "Beyond actual policy intervention, these measures also produced a confidence effect, thereby supporting financial markets. The fact that policymakers are ready to act at any time helps create a virtuous cycle, because optimism about the economic outlook pushes up the value of financial assets, generates a wealth effect, and avoids a tightening of financial conditions, which itself could lead to slower economic growth."
Comments