The accumulation of financial risks hidden beneath the surface is a significant challenge facing the current financial system. These risks are often concealed, complex, and interconnected, potentially threatening economic stability. Financial risks often lurk in various stages of economic activity in complex and ever-changing forms, such as through innovative financial products, shadow banking, cross-border capital flows, or digital finance. Their accumulation process may be masked by market optimism or regulatory lag, but once triggered, they can quickly spread through financial markets, causing asset price fluctuations, credit contraction, or liquidity crises, impacting the real economy.
Hidden risks refer to potential risks that are difficult to detect or quantify. They may be hidden beneath the surface, not easily discovered, or only exposed under specific conditions. These risks can originate from multiple sources, including but not limited to economic, financial, social, technological, and environmental fields. Due to the unpredictability and uncertainty of hidden risks, they can cause serious losses or adverse effects on individuals, organizations, or society.
What are hidden risks?
Specifically, hidden risks have the following characteristics:
Hidden Risks:
These risks often lurk beneath the surface, making them difficult to detect. Because they are not easily perceived, people often overlook their existence, making it difficult to take effective countermeasures.
Potential Destructiveness:
While hidden risks may not be immediately apparent, their destructive power and impact can be enormous once they erupt. Such risks can severely affect the economic, social, and environmental aspects of individuals, organizations, or societies.
Uncertainty:
Another characteristic of hidden risks is their high degree of uncertainty. Because they are difficult to predict and quantify, people often struggle to accurately assess their potential impact and consequences. This uncertainty makes it difficult to formulate effective response strategies.
Global Financial Risks: Accumulating Rather Than Reducing.
In the short term, the global economy will face a "trilemma" of reducing inflation, stabilizing growth, and stabilizing the financial system. Raising interest rates to reduce inflation may trigger an economic recession or even a financial crisis, making a soft landing more difficult. In the medium to long term, the global economy faces low productivity, low growth, high debt, and significantly increased geopolitical risks. Global financial risks are accumulating and accelerating, rather than being reduced. Predicting the triggers that will lead to a concentrated release of financial risks is not important; what is important is preparing for the next crisis, such as promoting innovation-driven "reindustrialization."
Manifestations of Risk
In the economic and financial spheres, latent risks may manifest as problems that are difficult to detect, such as non-performing loans and high-risk investments. In the social sphere, latent risks may manifest as deep-seated social contradictions such as social injustice and livelihood issues. In the technological sphere, latent risks may manifest as technological vulnerabilities and security risks. These latent risks may be triggered under specific conditions, thereby causing losses to individuals, organizations, or society.
To address latent risks, individuals and organizations need to raise their risk awareness and strengthen risk management. At the same time, governments and society also need to establish sound systems and mechanisms to promptly identify and respond to latent risks, ensuring the stability and sustainable development of individuals, organizations, and society.
In general, latent risks are potential risks that are difficult to detect and quantify, possessing destructive and uncertain characteristics. To address these risks, individuals, organizations, and governments all need to strengthen risk management, raise risk awareness, and ensure the stability and sustainable development of society.
Conclusion
Looking ahead, the global economy will face a triple dilemma in the short term: reducing inflation, stabilizing growth, and stabilizing the financial system. Reducing inflation requires raising nominal interest rates, but this will increase debt burdens and further lower asset prices, making it impossible to maintain financial stability and jeopardizing stable economic growth. However, failing to effectively raise nominal interest rates will not reduce high inflation, hindering the stabilization of inflation expectations and even posing a risk of inflation expectations becoming unanchored, thus increasing the difficulty of reducing inflation. The ultimate result may still be a forced and significant increase in interest rates, sacrificing economic recession or even a financial crisis for a reduction in inflation. Therefore, in the short term, the global economy faces increasing uncertainty and risk in achieving a soft landing amidst this triple dilemma. In the medium to long term, low productivity, low growth, and high debt in the global economy, coupled with increased geopolitical risks, are causing global financial risks to accumulate and accelerate, rather than be mitigated. The concentrated release of accumulated financial risks is only a matter of time. While the occurrence of a global economic or financial crisis may not be a simple repetition, it may follow a similar pattern. The triggers that lead to a concentrated release of risks are highly uncertain and random, but predicting such triggers is not so important. What is important is to prepare for the crisis in advance, such as accelerating the process of "reindustrialization" driven by innovation.
