Systemic Liquidity Risk: We've Got This One All Backwards

Something about the mainstream financial narrative is wrong, and not just wrong in one country, but all over the world. We hear of the US dollar crashing, yet it is other currencies priced in relation to the dollar that are declining. We hear of inflation running hot, yet the bond investors are not pricing it in. Global central banks are intervening into their domestic economies with unprecedented levels of large asset purchases and just about every major economy’s federal government is providing fiscal relief or stimulus to its citizens. Yet, economies across the globe are all yet to return to pre-crisis levels after 13 years, and sovereign bond yields have remained low; and, in the case of Europe and Japan, have gone negative and remained there for an extended period. Yet, this period has been characterized as an extended expansion and a recovery from the 2008 global financial crisis. Central banks have been promising normalization and rate increases, portraying wisdom and control of the markets and economy, yet none of them in over a decade have been able to achieve their stated goals.
This paper identifies what is wrong and discusses its impact on the insurance industry. Almost 80 years ago, in 1944, the global monetary system changed to set the US dollar as the global reserve currency. From that time period onward, our macroeconomic literature and theory has failed to adapt to this change. The global monetary system remains a shadow system, being neither regulated nor understood. The system fractured in 2007, creating a global liquidity crisis, causing global crises in 2008-2009, 2010-2012, 2014-2016, 2018-2020, with the fifth one already starting to develop in 2021. Evidence of this reality is easily discerned in publicly available data, particularly in bond yields, but due to the backwards nature of the financial narrative, the problem remains undetected and unfixed. This paper breaks down bond yields to expose the false narrative and explain the reality, providing risk managers with the understanding they need to prepare for the conditions of the macroeconomy ahead.
 
Find the Q&A here: Q&A on 'Challenging the Norm with Investments'