All this could set off a vicious cycle. Lower asset prices will shrink tax revenues. At the same time, demand for essential services will increase as many find themselves unable to finance their own needs. Fiscal positions will take a hit, resulting in lower government spending and higher taxes. That will only accelerate disinvestment.
The inability to convert investment into cash at current valuations means that individuals may be a lot less wealthy than they assume. They may have to consume less now in order to ensure sufficient cash for future needs, reducing economic activity. Lower levels of wealth also limit policy options for governments and central banks, which rely on mobilizing savings to boost growth and manage high debt levels.
That's perhaps the final irony. Whether real savings are higher or lower than currently believed, the result may be the same: a global economy mired in a prolonged period of stagnation.
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This article was provided by Bloomberg News.