More risk abundance…

The weather is one example of a complex system, and the economy is another.  There are multiple parts interacting with each other, and the way they interact is also subject to change.  For example, the long-held belief in the relationship between inflation and unemployment (when inflation is high, unemployment is low, and vice versa) has recently been shown to no longer exist, at least not in the way it was thought.

Faced with such complex uncertainty, governments need to take care how they attempt to influence the economy.  Also, having financial strength can help a country survive unpredictable outcomes.

In 2017, the UK was the only large advanced economy not to grow.  Last week, the International Monetary Fund put the UK next to bottom in terms of the strength of public finances.  The British government has

£3 trillion in assets, and £5 trillion in liabilities, giving it a negative net worth of £2 trillion.  Countries with high negative net worth are likely to need to tax more heavily in the future and run budget surpluses (known in the UK as austerity budgets) to bring assets back in line with liabilities.

Since the last financial crisis, the negative net worth of the UK has doubled.  From a risk management perspective, it would not seem a good time to take risks with the economy.

 

Sources:   Financial Times, The Economist

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