Article/Sina Financial Opinion Leader (WeChat official account kopleader) Project Syndicate
Author: Liu Qian
The next economic crisis is closer than you think. But what we should be more worried about is that under the current social, political and technological environment, a prolonged economic crisis, coupled with the new high point of income inequality, is likely to escalate into a large-scale global military conflict.
From Beijing - The next economic crisis is closer than you think. But what we should be more worried about is that under the current social, political and technological environment, a prolonged economic crisis, coupled with the new high point of income inequality, is likely to escalate into a large-scale global military conflict.
The global financial crisis from 2008 to 2009 nearly bankrupted many governments and triggered a systematic collapse. Policymakers used massive monetary stimulus measures, including quantitative easing and near zero (or even negative) interest rates, to successfully pull the global economy back from the brink.
But monetary stimulus is like adrenaline injected after cardiac arrest; It can make the heart jump again and the patient recover, but it cannot treat the sick heart itself. The treatment of the sick economy requires a series of structural reforms covering all aspects, from the financial and labor market to the tax system, the birth model and educational policies.
Politicians' rhetoric about reform has not been translated into reform itself. On the contrary, they focus on politics itself. From Italy to Germany, it seems that the time spent on the formation and maintenance of government is longer than the actual governance time. Another example is that Greece has borrowed money from international creditors again and again (barely) to maintain, but has not really started to reform the pension system or improve the business environment.
The absence of structural reform means that the record breaking excess liquidity injected by major central banks into the domestic economy has not been allocated to the most effective areas of the economy. On the contrary, excessive currencies have pushed global asset prices to even higher levels than before the 2008 crisis.
In the United States, house prices are now 8% higher than the peak of the real estate bubble in 2006, according to Zillow, a real estate website. The CAPE, a cyclical adjusted P/E ratio that measures whether the stock market price is in a reasonable range, is now higher than the level before the crisis in 2008, or even at the beginning of the Great Depression in 1929.
With the monetary tightening policy exposing the vulnerability of the real economy, the collapse of the asset price bubble will lead to another economic crisis - and this crisis may be more serious than the last one, because we have developed resistance to the most powerful macroeconomic specific drugs among our competitors. Over the past decade, the adrenaline injection, which has been used regularly in the form of ultra-low interest rates and unconventional monetary policies, has seriously deprived our specific drugs of their original ability to maintain strong stability and stimulate the economy.
Taking history as a mirror, the consequences of such mistakes may go far beyond the economic category. The research of Benjamin Friedman, a professor of Harvard University, shows that the periods when the long-term economic growth is not satisfactory also seem to be the periods when the public is angry and intolerant of minorities and other countries - followed by various kinds of turbulence, terrorism, and even war.
For example, during the Great Depression, President Herbert Hoover of the United States signed the Smoot Hawley Tariff Act of 1930 to protect American workers and farmers from foreign competition. The global trade volume has decreased by two thirds in the five years since the implementation of the Act. In less than ten years, the Second World War broke out.
Of course, World War II, like World War I, was caused by many factors; There is no standard path that will lead to war. But we have reason to believe that high income inequality plays an important role in triggering conflicts.
According to the research of the economist Thomas Piketty, the high point of income inequality is usually accompanied by a serious crisis. The level of income inequality will then decrease, and then rise again until it reaches a new peak - and a new disaster. Although the causal relationship between income inequality and world war or economic crisis needs further confirmation due to the limited number of sample points, we must not take this correlation lightly, especially when global wealth and income inequality are at their highest levels in history.
These problems, together with many other factors that cause social unrest and diplomatic tensions, such as scientific and technological subversion, unprecedented immigration crisis, anxiety about globalization, political polarization and rising nationalism, are even more worrying. These problems are not only symptoms of past policy failures, but also may become trigger points or stars of future crises.
Voters have enough reason to feel depressed and disappointed, but the solutions provided by the populists who cater to emotions they continue to support are unwise and will only make things worse. For example, despite the unprecedented interdependence among countries, multilateralism has become increasingly marginalized, and many countries - especially the United States under President Trump's administration - are moving away from pursuing unilateral isolationism. At the same time, Syria and Yemen are suffering from the brutal ravages of proxy wars.
Against this background, we must seriously consider the possibility that the next economic crisis may lead to large-scale military confrontation. According to the theory of Samuel Huntington, a political scientist, any prediction is not self fulfilling, and whether it can be realized depends on how people react. Under the current circumstances, global policymakers need to immediately push forward the structural reforms that have been committed for a long time, and replace blame and hostility with rational and mutually respectful global dialogue. Otherwise, it may be a global chaos.
(About the author of this article: Newspaper Syndicate is known as "the most intelligent column in the world". The author is from the world's top economists, Nobel laureates, and political leaders. The topics include the views of global political, economic, scientific, and cultural shapers, providing global readers with the most high-end original articles and in-depth comments from the world, It helps to interpret the "changing world".)
