It appears that asset bubbles have become the most potent instrument in the hands of the governments in their efforts to generate the elusive growth rates, and not just in the developed economies. The overriding theme of this year’s Global Systemic Risks review is the government policies that trigger, and in many cases foster, asset bubbles – self-perpetuating price or turnover increases in parts of the economy that create imbalances elsewhere.
The 2013 review includes two new sources of risk: the extraordinary rise in capital expenditure by global utility companies and the Japanese government debt, along with sources of risk that were covered last year: civil aerospace, the financial system in China and the U.S. farmland. Combined, these asset bubbles add over $ 4 trillion worth of “hot air” to the world economy. But above all, they create unsustainable imbalances in dozens of industries and are likely to cause significant wealth destruction if not timely deflated.
Needless to say, there are plenty of intricate linkages between all the risk sources that in combination serve as scaffolding for the world economy. The same industrial conglomerates supply capital equipment for the utilities, transport and infrastructure projects in China and aircraft engines for the aerospace industry. The same few banks that hold large part of the Japanese government debt or Farm Credit Funding bonds attempt to place parts of the project finance business in the market for the institutional investors. A clear view of these linkages and how they impact the true economic risks of institutional portfolios must be a key component of forward-looking strategic risk management efforts of principal investors.
