Policy Distortions Create Imbalances

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    The two types of policy distortions ‒ foreign exchange distortion and government and fiscal policy distortion ‒ create economic imbalances that can ultimately destroy growth potential, says Michael Craig, vice-president and director at TD Asset Management Inc. In his talk ‘The Imbalance Game: Stumbling From One Crisis to the Next’ at its ‘Sharing of Knowledge Learning Series,’ he said these create unsustainable growth in the early stages and give the appearance that economies are strong and robust. However, when this process eventually ends, there is no V-shape recovery. They will start impeding growth in later years as the slow process of deleveraging takes hold. Without policy distortions being fundamentally corrected, investors should continue to expect a low growth world with equity markets returning low to mid-single digits, yields on fixed income assets lower for longer, and volatility that is increasingly difficult to rein in. In this environment, however, being able to identify structural breaks or signs of policy reforms can help investors protect their capital and take advantage of opportunities as they arise.