Instability Rising: Why 2020 Will Be Different

Economically, the 11 years since the Global Financial Crisis of 2008-09 have been one relatively coherent era of modest growth, rising wealth/income inequality and coordinated central bank stimulus every time a crisis threatened to disrupt the domestic or global economy.

This era will draw to a close in 2020 and a new era of destabilization and uncertainty begins.

Why will all the policies that have worked so well for 11 years stop working in 2020?

All the monetary/fiscal policies of the past decade were simply extreme versions of tried-and-true policies that central banks and governments have used for the past 75 years to restore growth in a recession or financial crisis: lower interest rates, increase credit/liquidity, and ramp up government spending (i.e. deficit spending) to compensate for declining private-sector spending.

These policies were designed to be short-term stimulus programs to jump-start the economy out of a slowdown (recession), which typically lasted between 9 and 18 months.

These policies are now permanent, as the system is now dependent on these policies. Any reduction in central bank stimulus causes a market crash (witness the 20% drop in 2018 as the Fed slowly raised interest rates from near-zero) and any reduction in deficit spending threatens to trigger a recession.

The problem is that these policies create distortions that cannot be fixed with more of what caused the distortions in the first place: more extreme monetary and fiscal stimulus.

Systemic distortions include:

A. Soaring wealth-income inequality across the entire global economy.

B. Dependence on asset bubbles to generate the "wealth effect" that encourages spending by the top 5% who own two-thirds of the assets bubbling higher.

C. Dependence on asset bubbles to generate capital gains and property tax revenues for state/local governments.

D. Loss of cost discipline: the solution across the entire spectrum--government, corporate and household--is now to borrow more, not trim costs via innovation or increases in productivity and efficiency.

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