Lipton’s Three T’s are technology, trade and trust. The idea is that the uncertain direction of these powerful forces could change not just what households, companies and governments do, but how they do it. For example:
The disruptive power of accelerating technological innovation comes from its ability to enhance both supply and demand at the same time, particularly by lowering and eliminating barriers to entry for an expanding set of activities and interactions. Recent trade tensions are undermining global interactions that had already been disturbed by dissatisfaction with inequality fueled by unfettered economic and financial globalization. A pronounced trust deficit – in the establishment, traditional institutions and expert opinion – encourages economic actors to disengage, self-insure and have less faith in measures to improve the common good over the long term.
Debt, demography and devaluation are adding to the fragmentation amplified by the Three T’s.
An IMF analysis showed that total indebtedness is now higher than before the global financial crisis, and that the potential vulnerability of low-income countries is no longer mainly from excessive liabilities to traditional western creditors.
Accordingly, the two largest economies in the world came in for criticism from the IMF. China was cited for insufficient transparency in its dealings with low-income countries and the U.S. for the looming deficits attributable to its recent tax cuts and spending increases. “Demographic headwinds” in the form of aging populations were seen to compound downside risks for medium-term productivity and employment, as were actual and perceived competitive devaluations.
Returning to issues that policymakers have discussed many times before, the IMF delegates were again in broad agreement on what is needed. Quickly turning this into reality, however, is not something that the vast majority of participants felt confident about.
Concerns about implementation risks are compounded by the fact that history provides no guidance or insights on how the global economy and markets will navigate the upcoming transition in the central banking community – from policy normalization by a single systemically important central bank (the U.S. Federal Reserve) to a simultaneous process involving other systemically important institutions (particularly the Bank of Japan and the European Central Bank).
The Bottom Line
The IMF meeting produced neither a policy breakthrough nor a significantly better understanding of how and when the tug of war between current prosperity and future risks is likely to play out in the absence of better policies. This gives markets nothing new to grab onto, and will reinforce the “data dependency” mindset that has dominated key central banks. With that, we should expect continued market volatility, shifting asset-class correlations, and a continued high ratio of market noise to signal.
As to where it leaves my own probability assessment: Nothing came out of the spring meeting that alters my estimation that there’s a 65-35 likelihood of orderly transitions in economics, growth policy and markets.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco.
This column was provided by Bloomberg News.