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1. Crisis indicators.
a. Asset price inflation over the past two decades has created about $160 trillion of “paper wealth”.
b. Economic growth was sluggish, inequality was growing, and every dollar of investment brought $1.90 of debt.
c. Productivity growth in the G-7 countries was sluggish: a decline from 1.8% per year between 1980 and 2000 to 0.8% between 2000 and 2018.
d. Excess capital did not see productive investment opportunities, and most of it flowed into real estate and stocks, which led to higher prices.
i. In the United States, for example, the market value of real estate grew 1.5 times faster than GDP from 1995 to 2021.
2. Scenarios for overcoming the crisis.
a. Back to the past era. There is still a possibility that shocks will be temporary, low-interest rates will return and an increase in the balance will resume. At first glance, this scenario may seem attractive as wealth continues to grow. But this growth exacerbates inequality and continues to increase the risk of financial stress and future adjustments in all markets.
i. Centuries-old stagnation is returning. Inflation will decline over the next few years to well below 2%. Labor market tensions are decreasing and unemployment is stabilizing at slightly elevated levels. Demand is weak, and mediocre GDP growth of up to 1% resumes until 2030. Money hunts for capital growth opportunities, such as real estate, not productive investments. Real interest rates are becoming a little negative again. Capital is distributed irrationally, and productivity growth remains low.
b. “Reinterpreted” 1970s. If investment increases and excess savings decreases significantly, inflationary pressure may increase. This scenario has parallels with the stagflation of the 1970s in the United States, albeit with slightly lower inflation (4%, not 9%, as in the 1970s). There is a steady increase in income, a positive increase in well-being, and an improvement in the balance of the budget. There is an increase in defense spending by 2-3 p.p.
i. GDP Strong demand and higher investments – even if not all of them are productive – support GDP growth slightly above the current trend. With the displacement of the negotiating force in favor of workers and a tougher competitive environment, corporate income grows more slowly than income from labor. The market value of real estate is falling in real terms. Real household welfare is reduced by 8.5%, or $12.6 trillion.
c. An analogue of Japan in the 1990s. Very hard landing and almost lost decade. Tightening monetary and fiscal policy has put an end to high inflation. Financial institutions are under pressure, there is a loss of the value of bonds, as well as the value of commercial and other real estate, capital reserves are greatly reduced. The value of shares and real estate in the United States may fall by more than 30% until 2030.
d. “New economy.” Faced with difficulties in the labor market, companies are accelerating investments and the introduction of digital and automation technologies, contributing to productivity growth. Rethinking supply chains remain effective, and the new wave of developing economies provides enough labor. Industrial policy successfully stimulates innovation and technology. Inflation is falling to the target level, while real interest rates are rising to 1%, which further contributes to the placement of production capital.
i. The value of real estate is stagnating. The total value of bonds is growing to finance larger investments. Deposits in real terms are decreasing as central banks reduce their balance sheets through quantitative tightening. Real household welfare is growing in aggregate by 11%, or 16 trillion.