Quian Liu says the response to the 2008 economic crisis relied far too much on monetary stimulus, and far too little structural reform. The next crisis could come soon – and include large-scale military conflict

By Qian Liu*

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 2008-09 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 jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.

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 to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.

In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market 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 to 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 stabilize and stimulate the economy.

If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedma, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.

For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.

To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.

According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster. Though causality has yet to be proven, given the limited number of data points, this correlation should not be taken lightly, especially with wealth and income inequality at historically high levels.

This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including technological disruption, a record-breaking migration crisis, anxiety over globalization, political polarization, and rising nationalism. All are symptoms of failed policies that could turn out to be trigger points for a future crisis.

Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.

Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logic of the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.


Qian Liu is an economist based in China.  Copyright: Project Syndicate, 2018, and published here with permission.

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18 Comments

Firstly, I hope there is no major conflict internally or world wide after the next big downturn. Secondly, I hope we will begin to see the futility of our current system and the approaches we take to try and correct it.
But then again, hoping we learn from history always seems to be a futile hope.

Do you mean to get rid of fractional reserve banking ?

Global central banking ?

1 world currency ?

Yes, yes and possibly. For there to be a one world currency it HAS to be decentralised and sound.

Trump is not pursuing unilateral, isolationist policies. The war in Syria could currently be described as desultory rather than "raging".

This is how it works. The people perceive a pressing problem and vote in a leader that promises to correct the problem. This is democracy working. Democracy is populist by nature as the most popular candidates win.

With unprecedented access to information via the Internet the people can make much more informed choices. For example a quick read of the Wikipedia article on Project Syndicate that published this article reveals that it receives grants from the Open Society Foundation..

Yeah, like Hitler in Germany, eh?

Or any democracy anywhere. The only thing that changes is the scale of the rhetoric.

If the war in Syria spreads to Israel, this could be very dangerous for the world

China panicing?

Have to agree with the author.

The major world economies have very large debt/gdp ratios and their central banks have also moped up financial assets using their unconstrained ability to spend.

Debt is simply borrowing from tomorrow to have something today. Some is justified in terms of intergenerational equity, but the world has gone overboard.

Democracy needs to be strengthened worldwide. Technology now allows direct democracy to be a real option. Instead of voting for a party, voters could real-time vote issue by issue. This may offer the opportunity for more rational decisions to be made, e.g. debt levels, but its not guaranteed. (an aging population may still vote for unsustainable pension rights)

Otherwise there needs to be greater pressure for governing parties to act in the best interests of a country as a whole, not select parts of it. E.g. the US government shouldn't be allowed to extend and pretend by continually raising the debt limit. A practical debt limit effectively needs to be written into the constitution which is only to be exceeded in times of emergency.

MMP in the USA would help break the current bipolar political situation and allow the centre to be re-established.

The financial corruption of democracy has to end as well. Politicians need to be in government for the population as a whole, not their corporate sponsor. Financial donations from corporations have to be banned. Corporations & unions dont get to vote so they shouldn't get to donate. Also there should be a maximum limit on individual donations. Policy should not be able to be bought. This means greater public funding of parties & the people should get to vote on what level that should be.

The structural reforms that took place as a result of the depression were protectionist policies and these policies helped restore economic stability. Trump has been far sighted and is ahead of most of his counter parts by applying these policies.

The Chinese make out like they've invented some remarkable new harmonious system that the world can follow. Astonishingly Western organizations like the EU and the UN, troubled by pesky voters attracted to popular politicians, view the Chinese model with longing. If only they too could control the memes and punish the reactionaries. God knows they try with their calls for censorship and even imprisonment of folk who hold contrary opinions.

They are absolutely determined to continue on with their quest for a one world government. One way to do this is to eliminate the possibility of nationalism ever taking hold again. Mass immigration without assimilation is the key here. Even though the people are expressing concerns about unchecked immigration, they still push the narrative hard. According to them mass migration is "inevitable, necessary and desirable".

Yet the common man intuitively knows that this is not true. It is neither inevitable, necessary nor desirable. What the hell is going on? - he thinks. North Korea can secure its border pretty well. Japan has a great society in nearly every respect. It's actually very easy to secure borders. It's not surprising at all that nationalism is on the rise.

The remarkable harmonious system has defects. Check the links referred to in this article about repression of ethnic groups in one Chinese province. https://croakingcassandra.com/2018/11/10/some-reading-for-todd-mcclay/

Sure, many of the core issues have not been tackled. And things are currently tracking along with the hope that things will be all right. But to (quote a few people) and to suggest that depressions or major wars are likely is rather imbecilic.
Reading between the lines I think this Chinese person is excluding China from this commentary. As being superior in come way? I can't see why this would be.

This article claims there is a link between inequality --> economic crisis --> recession --> war. It is rather vague in its causality but may be true however I hope not since the next world war is bound to involve some of the many countries that possess weapons of mass destruction. --> end of the world.

Isolationist, prtotectionist, culturally repressive with huge gaps between the underclass on 2 wheels & the Party-connected elite, suppression of social media & a nonfree press, government involvement in every business so the rules can be changed on a whim, expansion of sea military bases, targeting of minority groups.
Yes, China is certainly a potential major player in these contributing factors/causes of war.
This forum, for example, would not be able to be expressed inside the Firewall.

I argue we are still IN a financial crisis one which has been over 20 years in the making. It began prior to the gfc during the era of run away asset prices, spans the subsequent financial collapse and credit crunch right through the q.e. era to the point of no return that we have reached to date, I doubt there will be a war, no one has any real money to finance one!

Looking through monetary history, both income tax and “governmental” money creation came about to pay for wars.
These days it will be more money creation, it steals the public’s wealth by taxation through inflation and directs it militarily.
The US isn’t exactly paying its military with real money right now...

Pretty sure tarrifs did NOT start WW2. WW3 is never going to happen, most of world population will be too OLD.