In his new book, The Twilight Before the Storm: From the Fractured 1930s to Today's Crisis Culture — How to Avoid a World on Fire, Viktor Shvets provides a clear explanation of how we got into this situation.
We are currently experiencing the aftermath of a Fujiwara Effect, in which two or more cyclones combine to form a single, powerful storm, according to the strategist at Macquarie Bank in New York.
His story revolves around three cyclones: the information age, financialization, and neoliberalism.
"We are at the edge of the most profound disturbance …" he told me during my in-depth chat with him last week over the book. the fourth significant turning point, which will drastically alter all human societies in a few decades, more so than anything that has occurred since the 15th century.
Neoliberalism
First, "Cultured by their naivete regarding the ability of the free market to offer efficient answers to almost any need – from the provision of medical services to execution of justice, satisfying a multitude of competing, and often contradictory, demands of independent consumers from social security to running research labs and fast trains," Shvets explains, neoliberalism is the result of Baby Boomers' desire for freedom and independence.
"The biggest irony of the most passionate proponents of neoliberal concepts [is] that their theories – albeit wonderfully modelled – failed to reflect how human societies work," nevertheless, as Viktor argues in his book.
Individuals will never be able to live with such instability and inequality, and they will turn to extremes if they are unable to find the correct solution from the parties in power.
Technology
Second, technology is changing the role and meaning of both labor and capital by disintermediating them.
According to a McKinsey research cited by Shvets, the impact is three thousand times more than it was during the Industrial Revolution because the current situation is 300 times larger and ten times faster.
"It lowers the marginal cost of everything to zero, and as the average cost drops, disinflationary pressures are created."
Financialisation
Third, Paul Volcker, the chairman of the Federal Reserve at the time, initiated financialization in the late 1970s and early 1980s by purposefully establishing a system that depended on debt and the international flow of capital.
Since most nations did not permit their currencies to reflect the clearing prices, Volcker's prediction that currencies would eventually rebalance their economies never materialized. With Germany, Japan, China, and Korea consistently running surpluses and the Anglo-Saxon US and UK consistently running deficits, we ended up with serious distortions.
"In the past, we only needed maybe $1 to $1.50 of debt per every dollar of GDP," Shvets told me during the conversation. We need about $3 to $4 today. Financial assets are worth at least $500 trillion and may reach $1000 trillion, which is five, six, ten, or even more than the world's gross domestic product.
"Financial cloud"
According to Viktor, the end effect is a "cloud of finance." Finance is the dog, and the real economy is (the) tail, if you build a financial cloud that is five to ten times bigger than the underlying economy.
Simply put, the goal of central bank policy is to prevent excessive capital from causing the real economy to experience severe disruptions, as was the case during the Great Financial Crisis.
Because the more capital you have, the cheaper the cost of capital is and the faster technology spreads, the cloud of finance also lubricates technical advancement.
However, Shvets asserts that the neoliberal revolution was the first.
"The new gilded age"
"Public sectors are fundamentally inefficient, and they have no method of acquiring all the meaningful prices in order to make decisions, suitable decisions," Shvets explained to me.
The best course of action is to leave it to the private sector because public sectors frequently act unfairly in their actions and methods. The private sector produces more effective and superior solutions overall, allocates capital more effectively, and has far greater visibility into market values.
The government was stifled, and for 30 years, government operations were deteriorated and budget deficits grew, but that did not imply that government spending as a percentage of GDP decreased. Additionally, it hindered the government's ability to respond to financialization and tackle inequality.
Although a new gilded age has been ushered in, output has not increased. Financial instability rose in tandem with the expansion of monopolistic forces.
According to my perspective, the neoliberal revolution brought about by Baby Boomers sparked financialization, which in turn fueled the ingenuity and inventiveness of people in the digital age.
Backlash
Even before the Great Financial Crisis, there was a backlash against neoliberalism, but it has since intensified.
Since "it is essential in order to re-establish societal agreement, reduce polarization, and minimize geopolitical pressures," industrial policies are currently being addressed worldwide and the state is typically taking on a larger role in society.
Shvets claims that the Millennials and Generation Z, who are taking over, have opinions that are more similar to those of their great grandparents than those of their parents or grandparents.
They make up 35–40% of adults in most countries, and they will soon make up the majority. The consensus will therefore be more in line with the 1950s and 1960s than the 1990s and 2000s; in other words, a world that is more socially and economically limited and where the government is more prevalent in all facets of the economy.
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