Time for a Great Reset of the Financial System

A 30-year debt supercycle that has fuelled inequality illustrates the need for a new regime.

One of the key drivers of inequality in recent decades has been the ability of central and commercial banks to create unending amounts of liquidity and new debt.

This has created somewhat speculative economies, overly reliant on cheap money (whether mortgage debt or otherwise) that has then funded serial asset price bubbles. Whilst asset price bubbles are an ever-present feature throughout history, their size and frequency has picked up in recent decades.

As the Fed reported in its 2018 survey, every major asset class over the 20 years from 1997 through to 2018 grew on average at an annual pace faster than nominal GDP. In the long term, this is neither healthy nor sustainable.

With a liquidity anchor in place, the world economy will then move closer to a cleaner capitalist model where financial markets return to their primary role of price discovery and capital allocation based on perceived fundamentals (rather than liquidity levels).

Growth should then become less reliant on debt creation and more reliant on gains from productivity, global trade and innovation. In that environment, income inequality should recede as the gains from productivity growth become more widely shared.

The key reason that many western economies are now overly reliant on consumption, debt and house prices is because of the set-up of the domestic and international monetary and financial architecture. A Great Reset offers therefore opportunity to restore (some semblance of) economic fairness in western, and other, economies.

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