Volatility: The Unsung Virtue of Economies
In pain, there's a potent lesson. Embraced rightly, it molds rockstars. Avoided, it begets zombies.
In finance, the allure is clear: products with low volatility and predictably pleasant returns. Instinctively, we recoil from the pain associated with loss. As a result, our financial structures are masterfully designed to evade volatility, casting it as the enemy.
Enter central banks, the anesthesiologists of the economic world. Whether it was the U.S. Federal Reserve shielding the economy repeatedly, starting from the Greenspan era, or Europe’s solution to pain through a unified currency, ensuring that Greece and Germany stood on level ground. Japan, a pioneer in this approach, started numbing its economic woes way back in 1990.
However, consider the case of Elaine, a child who couldn’t feel a cut, bruise, or burn due to her congenital insensitivity to pain. To her, pain wasn’t a warning—it simply didn’t exist. But the absence of this alert often put her in jeopardy. Just as Elaine’s lack of pain didn't mean she was unhurt, economies, shielded from immediate discomfort, aren't immune to long-term damage.
Pain insensitivity birthed 'zombie' companies across Japan, the U.S., and Europe. But let's juxtapose this with China—a nation that took the contrarian route. Opting to face the discomfort head-on since 2015, especially in its real estate sector, their strategy was clear: safeguard the macro by risking the micro. Yet, even they have their Achilles’ heel—social instability….
US real interest rates. Source: St Louis Federal Reserve.
Meanwhile, the U.S. and Japan grapple with a different sort of pain: geopolitical tension aimed at containing China. In a world reeling from the side effects of shrinking globalization, relying solely on monetary policy as an analgesic grows complex. As globalization wanes, transaction costs surge, and inflation runs wild, handcuffing central banks.
High real interest rates may be agonizing for the zombie economy, but they’re a fresh gust of wind for the global one. The mandate becomes clear: seek productivity or perish.
In pain, there's a potent lesson. Embraced rightly, it molds rockstars. Avoided, it begets zombies.
Thanks for reading,
Guillermo Valencia A
September 1st, 2023
Brazil