The world’s biggest economies are at risk of making bigger mistakes than those made during the financial crisis, according to top investor Rob Arnott who is known as the “godfather of smart-beta” investing.
The founder and chairman of the board of Research Affiliates, a global asset manager, told Financial News that the lockdowns forced by the Coronavirus outbreak has fuelled “asset bubbles” that will bring pain further down the line.
“The big issues are the lockdowns, and the resulting trillions in fiscal and monetary stimulus, fueling asset bubbles. The lockdown has inflicted a human toll that dwarfs the damage of the virus,” Arnott said.
Arnott’s comments come ahead of Federal Reserve chairman Jerome Powell’s speech to the Jackson Hole economic symposium – where major policy announcements are made.
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When asked whether the global economy is at risk of repeating mistakes of the 2008 financial crisis, Arnott said: “No, it’s much worse than that.”
Arnott warned against heavily relying on the concept of Modern Monetary Theory, the idea that countries that issue their own currencies can never run out of money in the same way a business or person can.
“We’ve already embraced MMT on steroids,” he said. “If we don’t step back and take a fresh look, the consequences of this spending binge and money printing will be devastating.”
Global economies have been battered by the coronavirus crisis, which forced countries into lockdown overnight.
The UK’s Office for National Statistics confirmed in early August that the country had stumbled into the “largest recession on record”. UK gross domestic product was estimated to have fallen by a record 20.4% from April to June 2020.
The US economy, meanwhile, shrank at a 32.9% annual rate between April and June, the deepest decline since its government began keeping records in 1947.
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Earlier this month, Mohamed El-Erian, chief economic adviser to Allianz, also warned that economies are at risk of making policy errors while battling the coronavirus crisis.
El-Erian, the former Pimco chief executive, told FN that global depression “remains a risk” but it could be reduced through “appropriate government policies and healthy behaviour modifications by individuals”.
“The bigger risk facing the global economy is a repeat of the policy mistake of the global financial crisis: that of winning the war against the threat of a global depression but, importantly, failing to secure… high, inclusive and durable economic growth,” he added.
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