A 1930s president set tariffs to put America first, then a world war broke out: is history repeating itself now?

Qian Liu says policymakers have sown the seeds of another economic meltdown because they went for a quick fix to the 2008 global financial crisis

Wealth and income inequality are at historically high levels, and might precede crises as severe as the Great Depression and the second world war

Reading Time:3 minutes

An attendee holds a placard during a rally with US President Donald Trump in Ohio, on August 4, 2018, when Trump defended his use of tariffs that have inflamed tensions with China and Europe, telling an audience of supporters that playing hardball on trade is "my thing". Photo: Bloomberg

Published: 12:09am, 12 Nov 2018Updated: 7:01am, 12 Nov 2018

The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.

The 2008 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.

But monetary stimulus is like an adrenaline shot to a stopped heart: it revives the patient, but it does nothing to cure heart disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labour markets to tax systems, fertility patterns and education policies.

10th anniversary of the financial crisis

Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.

The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated for the most efficient uses. Instead, it raised global asset prices to levels even higher than before 2008.

In the United States, housing prices are now 8 per cent higher than they were at the peak of the property bubble in 2006, according to the real estate website Zillow. The cyclically adjusted price/earnings ratio, which measures whether stock prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.

As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance for our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilise and stimulate the economy.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x