And given the lack of momentum from private and public sectors, U.S. growth will likely remain low for an extended period of time. While economic data releases have pointed time and again to delayed consumption spending and persistently high unemployment, available fiscal and monetary policy space seems to be quite limited. On the fiscal side, further stimulus will be constrained by the promised cuts in federal spending that accompany the recent raise of the U.S. debt ceiling. On the other hand, the Fed’s commitment to maintain the federal funds rate “exceptionally low” at least through mid-2013 should remind us that, in order to be even more accommodative, the Fed might need to rethink and come up with some creative policy actions – probably something that is much more creative than the recent “Operation Twist” that seems to disappoint many market participants. The fact that the U.S. government and the Fed are running out of traditional policy “bullets” leaves one only to wonder what the government and the Fed will do in the face of future shocks. And if they eventually resort to “creative” policy actions, the implications of their policies on the global economy can be quite unpredictable. Across the Atlantic, the Eurozone is also struggling with their sovereign debt crisis, which only deepens and intensifies as time passes. Over the past few months, we have seen some Eurozone member countries that are unwilling to collaborate fully, let alone going the extra mile, to get the problems solved.
The emergence of substantial markets in forward, futures, options swaps and other derivative instruments has significantly altered the conduct of borrowing, investment and risk management activities. The significant economic benefits of financial derivatives include: (i) permitting the unbundling and trading in risks, (ii) the ability to hedge price risks and to synthesise investments with greater efficiency and lower costs, (iii) and an increasing liquidity of and trading in financial assets. I would expect this process of constant innovation to continue in the decade ahead. First, because innovation is a natural feature of modern financial markets. The expansion of the credit derivatives in the last five years illustrates how fast new instruments cans develop and expand. And, second, because markets are still incomplete, in the sense that some risks cannot be efficiently hedged or transferred in the current environment. B  Incomplete markets and intergenerational risks  One interesting example is demographic risk, and more generally, the efficient transfer of risk between different generations. Currently, markets may not be well equipped to deal with intergenerational risk that simultaneously affects different generations living at the same time. Many developed countries are going through a demographic transition, sometimes called the old age crisis. According to the World Bank’s 1994 report for instance, by 2030 there will be 1.4 billion people in the world aged over sixty, versus 500 million in 1990. So, we are experiencing a transition to an economy with many more aged dependents relative to the active workforce.