Sony Kumar's BLOG

I am not sure if most banks in the west want to finance productivity, efficiency and sustainable economic growth. And why do I say that? Well, let’s see, a very large part of the banks’ balance sheet seems to be allocated towards financial market transactions. Be it growth in lending to private equity firms, which has grown exponentially over the years, and is probably now closer to $9 trillion, or lending related to real estate transactions, which is basically directed more towards ownership of an asset class rather than financing productivity etc. in the real economy.

 In economies like the UK as well as the US, among others, wealth creation is now directly linked to real estate investment. And increasingly, a new breed of very young investors is creating their wealth by investing in the public market. So, even when the money isn’t flowing into the real economy, making it much harder for SMEs to raise capital, the public markets, however, are record high.

I do wonder if some people do fail to realise that a company’s publicly traded stock and the company aren’t the same thing. Market psychology and sentiments influence the pricing of a company’s stock, and sometimes even if the company might be doing quite well on most fronts, the underlying stocks of the company may struggle.

 Most of the financial data, including GDP, inflation, employment figures, among other indicators are flawed. They aren’t designed scientifically, and therefore, fail to capture the real picture of the economy. So, I am afraid, I won’t trust a financial analyst (including myself) to fly a plane, because I know the data used by the analyst to create a model will always be subject to interpretation, unlike hard scientific data.

You could create economic activity and maintain record high pricing in the public markets by financing consumption, and that’s what happens. This is why inflation targeting is a key function of most central banks. Inflation is a cancer that can kill consumption, and if your economic growth is directly linked to continued consumption, then inflation will cause huge problems because higher interest rates will damper consumption over time.

 The design of the modern economy encourages consumption at all costs, so people are able to use their credit cards to finance their consumption needs. And therefore, it becomes difficult for central banks to curb inflation. While high interest rates do hurt average people in society as well as companies, a high interest environment isn’t all bad for the banks. For example, global banks are expected to generate over $10.4 trillion in net interest rate income in 2024, which should be good for their shareholders.  

 If a sizeable percentage of the money creation by the banks was directed towards productivity and efficiency, then you may realise that the existing economic channels work rather well. Having said that, today, central banks are more focused on keeping the financial markets more stable than improving the quality of life of average citizens.

 Maintaining strong employment is now quite strongly linked to consumption. So, it is probably safe to conclude that policymakers, including the central banks, don’t really care much about productivity-linked growth in the economy. This is probably because the market is very short-term focused. Therefore, I do ask myself if central banks are no longer the banks of the people, but perhaps reluctant gatekeepers of the financial market.