Q. So we’re nearing a bubble?
A. Go back to central banks. Central banks look at growth, at employment, at wages. They are too low. They don’t have the instruments they need, but they feel obliged to do something. So they artificially lift asset prices by maintaining zero interest rates and by using their balance sheet to buy assets.
Why? Because they hope that they will trigger what’s called the wealth effect. That you will open your 401k, see it has gone up in price, and you’ll spend. And that companies will see their shares are going up and they will be more willing to invest. But there is a massive gap right now between asset prices and fundamentals.
The West fell in love with the wrong growth models 10 years ago. It fell in love with finance as an enabler of prosperity. The whole society fell in love with leverage and credit as a way of prospering. We were entitled to accumulate debt! People bought homes they could not afford. Governments borrowed money that they could not pay back.
Regulators believed that finance was so sophisticated that you could lessen regulations on it. This romance with the wrong growth model fell apart in 2007 and 2008.
Q. Now what?
A. We are struggling to find a new growth model because the political system hasn’t stepped up to its responsibilities. Obvious things like investing in infrastructure at extremely low interest rates are not being done. The reform of corporate taxation. The reform of labor markets – retraining workers, developing apprenticeships through public-private partnerships.
Either governments and politicians and companies will step up to their economic governance responsibilities and we will turn to something sustainable or, if we don’t, then you will have low growth and financial instability.
Income inequality has risen so much that consumption as a whole is undermined. That’s because rich people have a much lower propensity to consume than poor people. But it is the rich people that have captured all the income growth for the last seven years.
A little bit of inequality is good for the system because it creates incentives. A lot of inequality actually creates negative economic effects. It has become an inequality of opportunity.