Market Shocks, Financial Literacy, and Net Worth

Abstract

Global shocks typically inflict large persistent contractions on commodity prices compared to small transitory contractions on equity prices. The resulting output headwinds and asset tailwinds set the global income statement and balance sheet on divergent paths. The cognitive capability to trace the exposures of income statement transactions and balance sheet portfolios to global shocks and the adaptive capacity to take steps to cover exposures become essential for modulating the pass-through from global shocks to global wealth or net worth. While output-centric literacy remains a crucial determinant of net worth, the realities of smaller and uneven margins along value chains compared to larger capital gains across asset types mean that asset-centric literacy is the most critical determinant of net worth. Each country’s performance across three criteria- GDP growth, FDI stock, and servitization- should identify her as an adjuster who possesses the cognitive and adaptive capabilities to modulate the pass-through from global shocks to national liquidity, sectoral resilience, and growth, or as a non-adjuster who needs these capabilities. We highlight measures of global shocks that global watchdogs must now emphasize, and we offer strategic insights on how country managers can modulate pass-through from global shocks to wealth.