Politicians ignored the impact of easy money on the financial markets following the overlapping financial, fiscal and economic crises of the last few years, writes Prince Michael of Liechtenstein.
They tried to blame the markets for the crisis and curb, plan and regulate them even more.
They failed to take account that markets could be unpredictable because they were already distorted by a policy of easy money, excessive sovereign debt which created additional liquidity, political pressure from America in the late 1990s and early 2000s to extend insufficiently covered property loans, over-regulation in Europe, especially on the labour markets, and other globally regulated protective measures.
Politics continues to distort markets, disrupt competition with the wrong incentives or by imposing limits, and has a huge influence especially on price building with long-term highly detrimental impacts.
So what are the causes and consequences of the price development of currencies?
Central Banks had to provide liquidity to the economy in 2008, 2009 and 2010 following the meltdown caused by the subprime mortgage crisis and the sovereign debt crisis.
However, the sovereign debt crisis remains chronic due to insufficient reforms. There is a lack of trust in the future, especially in Europe and Japan, for various reasons. Over-regulation is causing less investment and lower employment by business. Public spending on infrastructure is hampered by the huge costs of an oversized public sector.
The responses are not real reforms which favour competition, investment and innovation because these may be unpopular. Instead, the ‘treatment’ consists of more regulations and pressure on the Central Banks to provide even more cheap money.
This should, in theory, enhance consumption and help the economy. But this money fails to trickle down to the economy and has the following negative effects:
-The outside price of the currency devalues which, in theory, should help exports. This works only if it is limited to one economy doing this. If there are more, as we see now, we have a race to the bottom. This is a protective measure which hampers global competitiveness in the long term.
-The politically cheap price expressed in interest rates which are too low or negative, has added negative impacts with governments continuing to accumulate debt and under insufficient pressure to reform. Meanwhile, savings in pension funds are eroded and a new asset bubble develops, denominated in the prices of shares and property.
These facts spell out how price distortions and market excesses are, in the majority of cases, not caused by market failures but by outside factors and especially political decisions. This is not only the case for currencies but also commodities, raw materials and energy.
Too often these political decisions are short-term, not thought through and entirely populist - or a mixture of all of them.
For business and politics it is essential to consider geopolitics in making decisions to avoid unintended consequences.