Olivier Blanchard, former head of Research at the International Monetary Fund is now at the Peterson Institute. His post on the recent stock market action is amusing at one level and thoroughly useless, at another level. If I may add, it borders on the ludicrous, in fact.
It is evident that it has been written by a thoroughbred academic who has no grasp of financial markets. As stocks fall, Mr. Blanchard thinks that it is due to investors’ herding behaviour. As they rose, …? What drove them? Fundamentals?
Apparently, China is not collapsing. How does he know? Perhaps, in his book, every day confessions of activists, lawyers and others and disappearances of businessmen and booksellers are normal, trivial occurrences and do not suggest that something bigger and more worrying is afoot.
Real GDP growth is boosted by deflation and nominal GDP growth has no bearing to corporate revenue growth. The central bank has asked banks to limit sale of foreign exchange to multinationals and some banks have been stopped from participating in cross-border yuan transactions for some months. So, one presumes that all of these are business-as-usual for Mr. Blanchard.
In the United States, when central banks’ liquidity and stock buybacks drove stock prices, there was no herding. It was all very fundamentally driven. Now that stock prices are declining, they are just herd-like behaviour.
The commentary reveals one thing. The level of understanding , or more precisely, the lack thereof, of the economic reality and its relationship to financial markets displayed by policymakers (ex and current) has one important message for us.
We now know why most of these academic-economists do not acknowledge the consequences of policy actions on financial markets and the impact that asset price movements have on the real economy. They have no clue and they do not seem to have invested any effort in removing that lacuna.