A decade on from the start of the financial crisis and we’re still feeling its impact. Despite talk of a global recovery, many major global economies remain in a fragile state, while some countries, such as Greece, remain so crippled with debt that any meaningful growth remains practically impossible.
Indeed, solving a debt crisis by directly financing the issuance of even more debt is the paradoxical solution that the major central banks have implemented over the last ten years. There’s no question that, backed into a corner, the central banks did what they needed to do in the midst of the financial crisis. However, there is a risk that the side effects of the monetary drug they prescribed prove to be more damaging in the long-run than the underlying economic illness.
By pumping money into the markets and artificially inflating asset prices, central banks kept the whole financial system on life support. The idea was to create excess liquidity to keep economies moving. However much of that extra money stayed in the financial system. Rather than working to the advantage of the real economy and society as a whole, it benefitted those already invested in financial assets, making the rich richer. Continued monetary easing and growth in central bank balance sheets has depressed the rate of interest on government bonds by as much as 1% on some estimates. It has also caused a collapse in risk premia as the weight of money compresses yields on risky as well as government liabilities.
As a result, companies have been able to borrow at low levels of interest and have chosen to invest in other financial assets, whether their own or those of other companies, through share buy-backs and mergers & acquisitions. Precious little investment has found its way into the real economy. Many executive compensation schemes are still tied to share price performance rather than underlying wealth creation. With real investment levels remaining stagnant, employment and real wage growth have also under-performed financial assets. As a result, wealth inequality has increased in the UK, Europe and the US over the last ten years.
Growing income and wealth inequality has fuelled popular disillusionment with the political and financial establishment and a rise in political extremism. Far-right political groups have made major inroads in the French, German and Austrian elections this year. This follows the upheaval of the Brexit referendum and Donald Trump’s election to the White House in 2016, both campaigns which had been supported, at least in part, by groups with extreme views. It appears to be no coincidence that the slow but steady rise of political extremism in Europe and the US has occurred in parallel with the widespread policy of quantitative easing.
The charge against Capitalism is that it does not provide fair and sustainable outcomes for society in the long term. Faced with seemingly unending economic austerity and a reduction in real standards of living, ordinary people are increasingly abandoning the parties of the centre for the easy answers of the populist left and right. The result is growing political risk and a further disincentive on the part of businesses to invest. The monetary drug is currently masking this political polarisation while the system becomes gradually more unstable.
This disillusionment grows to reject not just the political establishment, but also the process of globalisation, which is perceived as favouring the few over the many. Further anger is now also simmering among younger generations who are observing the unsustainable rising debt burden looming over their own futures.
The irony is that the global financial system is moving towards a potentially bigger risk than it faced in 2007. History will not look kindly on the central bankers who facilitated the inflation of these social, political and financial bubbles.
This is a deep-rooted problem with no quick fixes. However, we have survived as a race because we are resourceful and have an unparalleled ability to adapt. We need to evolve from a culture of consumption to one of investment. We need to borrow and spend less, save and invest more. Becoming better investors and taking charge of our financial future is now both a personal and social imperative.