In an effort to salve the wounds of the financial crisis and the great recession global central banks, led by the Federal Reserve, have employed a monetary policy never before seen. Global central banks have been trying to hold the world economy together by pushing interest rates to zero and then to unheard of negative interest rates, a policy only outdone by the length of time in which it has been implemented. Nearly eight years of zero and negative interest rates artificially controlled by central banks has distorted, if not eliminated, free market price discovery. This unprecedented monetary policy has resulted in a monumental financial benefit to the few at the cost of the many, driving economic disparity among the population of the developed world to a degree not seen in generations.
The seeds of this economic divide have been sown for nearly thirty years and are now manifested in disenfranchised voices around the world. These Populist voices were heard in last summer’s Brexit vote, the election of Donald Trump last month, and over the weekend as Italy rejected a constitutional referendum that was supported by the incumbent government and vehemently opposed by the antiestablishment 5 Star movement. The coming elections in France, Germany, and the Netherlands will likely echo similar populist sentiment.
Indeed, an unprecedented central bank monetary policy that was intended to first prevent a systemic financial collapse and then incentivize corporate investment and consumer spending has caused the unintended consequences of a populist movement and a renewed sense of nationalism. These powerful sentiments threaten an already unstable European Union, as well as run the risk of trade policies that could further inhibit global growth and possibly trigger a global trade war. Further consequences, intended or otherwise, may manifest over the weeks and months ahead. The immediate economic impact of the Brexit vote was not nearly as negative as first thought and the US equity markets have rallied significantly since the Presidential election last month. At first blush, Italy’s rejection of the constitutional referendum has been taken in stride. However, the economic implications of social movements take time to work their way through the economy and though financial markets react very quickly to discount the financial future we do well to remember that they are notoriously fickle in the face of changing sentiment.