Combined with the transformation and migration of financial risk, including investor overconfidence in the depth of market liquidity, these conditions are making the overall system less stable and unconventional monetary policies less effective. If you add inadequate global policy coordination, there are real questions about whether a low but stable growth equilibrium can be maintained for many more years.
Rather than frame these scenarios as competing narratives, it may be more appropriate and insightful to combine the three into a road map for the future of the global economy and markets.
Absent a major policy mistake and/or a big market accident, the immediate future promises more of the same: low and relatively stable global growth with central banks still engaged in trying to repress financial volatility. But with markets increasingly sensing the extent of underlying tensions and contradictions, financial instability is likely to increase, which could complicate the situation in even the better-managed economies. In those conditions, low but stable growth and financial calm would prove harder to maintain, and market sentiment would fluctuate in a widening band, with more frequent and more violent oscillations.
In such an environment, the volatility-repression policies of central banks would come under increasing pressure, and some could find their involvement becoming ineffective and perhaps even counterproductive. All of which would bring the global economy closer to a T junction within the next three years: The current path of low and stable growth, coupled with repressed financial volatility, would end, leaving a choice of two diverging roads ahead. Which path will be followed -- higher more inclusive growth and financial stability, or recession and financial instability -- will depend on whether politicians enable a successful transition from overreliance on central banks to a more comprehensive economic policy stance.
Mohamed El-Erian is chief economic advisor at Allianz SE.