These are just some examples of volatile and unusual markets, and they follow an already considerable number of unusual developments, including low oil prices that are viewed in the West as a curse rather than a blessing as well as investors being forced to pay for the privilege of investing in about 30 percent of the global stock of government debt. This list will continue to grow.
It is natural for commentators to turn to individual explanations for each of these developments. But this approach does not give us enough of a sense of what is likely to come next.
The growing list of improbable developments is indicative of a global system that is signaling a major transition -- away from an order in which central banks effectively repress financial volatility and toward one of higher and quite unpredictable volatility, in both directions. And far too many portfolios, having been conditioned to rely excessively on central banks, are not yet positioned for this transition.
So far, the damage from increased financial volatility has been contained to the financial sector, forcing some deleveraging. It has not spilled over in any meaningful sense onto real economic activity. That is fortunate as the economy is not well positioned to take on yet another challenge.
The U.S. economy already is working hard -- and so far successfully -- to overcome the headwinds produced by weaker growth in other countries. Continued financial volatility could add to this drag by making both households and companies more risk averse. If consumers are unsettled by wild markets, and particularly their implications for the stability and predictability of investments and pensions as well as the availability of financing, they could decide to spend less; and companies could scale back their investment outlays. This would weaken markets further, threatening a cocktail of adverse spillover and spillbacks.
Fortunately, that hasn’t happened yet. But it is a risk that we need to monitor carefully in the weeks ahead.