GLOBAL RISK MONITORING reaches critical threshold. USA at risk?
For the 1st time since 2008 our GROM Global Risk Indicator has reached the critical level of 9 (1 – 10).
By Christian Takushi MA UZ, May 6 2015.
The Global Risk Level has now reached the threshold of 9. Based on our experience with models, we should say that this doesn’t necessarily mean that a Crisis is about to break out or is imminent. It shows rather that we are entering a space where the conditions are present for a major global crisis or a serious cascading of crises. Put it simply, monitoring 15 major global sources of risk and tension, we can say we are headed into a volatile 2nd half 2015.
Actually it is the first time since 2008 that we have a reading of 9. With crisis’ ingredients now present – something many observers are unaware of – the current global convergence or overlap of trends is not limited to the conventional macroeconomic and geopolitical realms. Other trends even in the realm of religion and our physical-natural world are interestingly overlapping one another during 2015-2018 as well. In other words, we are dealing with an unprecedented convergence process. Therefore a serious crisis could cascade into multiple spheres of life and society, reaching beyond the monetary system and financial markets – resulting in a super crisis.
Being critical with every risk model, ours included
Having said that, with the high level of control by policy makers over financial markets, only a significant event or array of events is likely to unleash a major crisis. A small to mid-level event is likely to make policy makers intervene directly and quickly in the aggregate supply and demand, for instance by lending to businesses, buying bonds, REITS and equities to keep asset prices where they want them to be. Central bankers will try again to support economic activity by supporting asset prices. Thus, policy makers could be able to contain a small to mid-level event. But the point I want to make is: over the next 3 years a significant or major event is likely, either completely external or resulting from the friction of several trends overlapping with fury. Such a significant event or overlap could additionally shock most of the over 15 global risk sources we face, allowing them to reinforce one another and cascade. Such a super crisis would overwhelm policy makers, too used to be able to control supply, demand and interest rates over the past 5 years.
Nevertheless we cannot rule out, that despite a heightened risk situation at several regions, i.e. Ukraine and the Middle East, we could see the Global Risk Level dropping from 9 down towards 8 again. There are 12 other risk factors (economic growth, monetary policy, food security, geophysical & climate stability etc) that could decline and allow for a global relaxation of tensions.
Additionally when a model output reaches a threshold, we should interpret that number as being a stochastic (i.e. a probabilistic or approximate figure) rather than an exact figure. Thus a reading of 9 is in fact an approximation (of the true value). We all should enjoy model results with caution and even a healthy disbelief, since models simplify reality and use assumptions to achieve their goals. In that sense they are an aid, a helping tool to an informed mind. Economic and financial history is littered with disasters, because of excessive reliance on models and computing power. We must keep our common sense and proactively balance different or opposing perspective before reaching any conclusions.
Policy makers have become a double-edged sword: Unlike past decades, policy makers now dare to directly intervene in the market functioning, effectively at will without restrain and oversight. Central governments, parliaments and citizens tolerate this out of fear of recession or crisis escalation. This interventionistic mindset is dreaded by many macro economists, that see in it the factual de-activation of our Free Market Economy.
Freely moving markets & currencies essential for shielding the Macro Economy and Risk signaling
A tightly government-controlled financial market will unfortunately fail to play its critical role as an early indicator of risks approaching and as an effective valve for the releasing of pressures. With the most important financial market (US Treasuries) directly managed by the FED and important currencies removed (Eurozone), pegged (China) or de-facto managed (Euro, Yen etc), the next major shock may have an unhindered powerful impact on the real economy.
Article was truncated here
Christian Takushi, Macro Economist, on May 6th 2015.
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