The last-chance saloon

In fact, for nearly a decade and a half the only way central banks and governments could really lose was by not further wedging open the liquidity taps. Eurozone policymakers dithered for more than a year before European Central Bank president, Mario Draghi, gave his infamous “whatever it takes” speech in July 2012, and in doing so nearly sealed the fate of the central currency and, potentially, the whole EU project.

In the political realm, fiscal conservatism has consistently lost out to further mortgaging the future for near-term support for economic wellbeing – unless the austerity is mandated by the bond vigilantes, of course. Austerity laid the groundwork for the UK’s exit from the EU and the fall of David Cameron – and three of his successors – as prime minister. US governments, supported by the advantages of having the world’s reserve currency, appear to have abandoned any sense of fiscal reality at all.

The ongoing bonanza of supernormal liquidity was fine for a while, but we always knew the return of inflation would stop the music. Over time, that risk seemed to recede: I remember writing extensively about the risk of inflation around the turn of the previous decade, but by the time of pandemic-era QE warning about inflation seemed like a Cassandra prediction – or at least the old line about certain data sets predicting 15 of the past three recessions.

We probably all knew it had to happen eventually, even so. That said, I am not particularly impressed by the line that inflation was the product of over-stimulus during the pandemic. For one thing, it is easy to be wise after the event; I cannot be the only person who remembers the all-pervasive fear as the reality of what COVID-19 would mean spread in February and March 2020. Perhaps we could have ‘got away with’ a little less drastic a response. I won’t be faulting anyone for erring on the side of caution.

More to the point, while the pandemic may have been the tree trunk that broke the camel’s back, said camel was already straining under the weight of successive rounds of stimulus. Whether an eventual inflation breakout or the dreaded “Japanification” of much of the developed world was the end game, the camel was not going to make it back across the desert. The pandemic merely accelerated its demise.

I think we have to dig deeper to get to the heart of the challenge developed economies are facing today, though. After all, the financial crisis was no orphan; instead it was the logical outcome of a series of decisions and preferences that played out over the three preceding decades.

There can be no doubt, in retrospect, that at the very least a significant component of the wealth boom the developed world experienced in the era of what can loosely be called postindustrial market capitalism was driven by freeing up access to credit. This spurred an initially steady but increasingly pacy inflation of asset values.

In short, we kept borrowing to buy houses from our parents’ generation, with price growth that could be explained most readily by a long-term reduction in credit cost. Almost every political-economic measure put in place over the past 40 years – from global migration to tax incentives to QE – has acted to prop up, or further inflate, the asset values of those who already hold significant equity in the economy. This most commonly means property but the almost unceasing upward march of equity markets and compression of bond yields speaks to the same phenomenon.

The fundamental problem is that this model is getting close to running out of road – for three reasons. The first is the most obvious. Financial system and economic crises, followed by the pandemic, have forced the government sector to assume responsibility for the ever-inflating credit bubble, and governments have much more capacity to keep kicking the can down the road than any private-sector entity. But, as events since 2022 demonstrate, this sort of party cannot go on for ever.

The second factor is sustainability. Global warming is an existential threat and one that, to date, humanity is not successfully confronting. We will need yet another round of stratospheric level investment to build sustainable infrastructure, not to mention the cost of adapting to the level of climate change we have already created and continue to bake into the world’s future.

The important clarification here is that it is not ‘humanity’ that is failing the climate change challenge but ‘humanity under its current systems’. In short, it has become abundantly clear that deregulated capitalism does not have the mechanisms to respond to a problem that requires appropriate valuation of externalities. We can see in the process of developing sustainable finance taxonomies that regulation will be critical to our hopes of mobilising capital for transition. At the same time, unfettered growth may no longer be a positive outcome.

Finally, the most recent development: the emergence of AI technology. No doubt we have all joked at work about being replaced by a chat bot, but from what I have already seen this technology will inevitably have profound economic impacts that we are only just beginning to comprehend the scope of.

I am absolutely certain that generative AI will replace swathes of the white collar workforce. We are already seeing that bots can – or at least are very close to being able to – replace much of the workload of junior lawyers and coders. It will not be necessary to have human beings in most of these roles by the end of this decade. The mainstream media has created a business model over the past 20 years in which the role of junior journalists is increasingly to reproduce content from social media. Chat bots can do this job now.

We have talked about automation for decades, but my sense is that it has typically been in the vague sense of robots replacing factory workers – a theoretical concept that has limited impact on the postindustrial developed world or, more to the point, those of us that work in finance and policy. Will we take automation more seriously when it is our children’s jobs that aren’t going to exist in a few years’ time? Our own?

Ultimately, this is a story about distribution of wealth. Accumulation of riches on a grotesque scale is hardly new in human history but it has surely reached its zenith in recent decades as the value accruing to capital owners multiplied exponentially. Most people were prepared to tolerate this for a while: as I wrote at the end of last year, it is easier to ignore the billionaire’s private island if one is able to take an annual foreign holiday.

What we see now is even the smaller benefits of having equity in the system – home ownership, for instance – becoming more tightly held. We cannot borrow from the future indefinitely to prop up asset values, nor can we rely on endless growth. And now we can no longer assume ‘our’ children will be alright if we only invest enough in their education and get them on the right career tracks.

We have already seen the warning signs of what could happen when people reject increasing economic marginalisation: the rise of far-right adjacent populism may be off the boil for the time being but it is not going away. Ultimately, it is hard to see how the centre can hold when fewer and fewer people feel they are on the positive side of the economic ledger.

I am too young to remember the 1950s vision of the 21st century, but I have seen pictures. Computers and machinery were meant to deliver us lives of leisure, producing everything we could possibly need without the need for labour. We have the technology, and yet we are working harder than ever.

Is it too much to hope that, this time, we can pause long enough in our headlong adoption of technology to work out how its undoubted benefits can be shared by more than the people who already own the delivery systems? It had better not be, because we may not be able to afford to fail again.