11  Looking further ahead, developments in global financial markets will have a considerable impact on the GPFG. Higher inflation and signals that interest rates will be raised faster than markets expected have recently made investors uneasy. The long equities bull market may be nearing an end. In a transitional period, higher interest rates will also reduce the value of the GPFG’s fixed income portfolio. NORGES BANK ECONOMIC PERSPECTIVES 17 FEBRUARY 2022  Developments ahead may also be marked by demographic changes, tension between countries and lower global trade integration. Moreover, we are facing a necessary transition to a low-carbon economy. Whatever happens abroad will still leave its mark on the GPFG. No investment is completely safe, as history has shown. In 1904, the Norwegian government set funds aside in the State Reserve Fund to be used only “in extraordinary circumstances or in an emergency”. When it was dissolved in 1925, it was nearly empty. Creative accounting must take some of the blame. Yet it didn’t help either that it was invested in only a few assets – mainly UK, French and German government bonds – investments regarded at the time as absolutely safe. After the First World War, the value of German and French government bonds was close to zero, wiping out much of the State Reserve Fund’s assets.5 The investment strategy behind the GPFG stands in stark contrast. The fundamental principle underlying the strategy is risk diversification. This lessens the potential for an across-the-board value decline in GPFG assets.
(2016)  10  8  8  6  6  4  4  2  2  85  Weaker competitiveness  1925  10  ECONOMIC PERSPECTIVES 17 FEBRUARY 2022  1927  1928  1929  0  0 1924  1925  1926  1927  1928  1929  Source: Grytten (2008)  Source: Grytten (2008)  The events around the time of the first annual address raised issues that are still relevant today. What is the role of the central bank, and how far does it extend in normal times and at times of crisis? NORGES BANK IS BANKER TO THE BANKS The central bank’s overarching goal is to promote economic stability. That lies at the core of our mission to serve the public interest. Low and stable inflation is a precondition for economic stability. Other important preconditions are stability in the financial system and a safe and efficient payment system. The banks’ settlement system, the very core of the payment system, is operated from the central bank. Norges Bank is banker to the banks. Banks can turn to us as lender of last resort when other credit channels dry up. Norges Bank conducts continuous oversight of the financial system. When large shocks hit the economy, our workday abruptly changes. The central bank then takes on a key role in stabilising the markets. Shocks stem from various sources. In the 1920s the problem was insolvent banks. The 2008 financial crisis engulfed the entire global financial system.