London Daily

Focus on the big picture.
Tuesday, Nov 18, 2025

Populism could spark crisis in 2020

Populism could spark crisis in 2020

Predicting the next crisis-financial or economic-is a fool's game. Yes, every crisis has its hero who correctly warned of what was about to come. And, by definition, the hero was ignored (hence the crisis).

The best that economists can do is to assess vulnerability. Looking at imbalances in the real economy or financial markets gives a sense of the potential consequences of a major shock. It doesn't take much to spark corrections in vulnerable economies and markets. But a garden-variety correction is far different from a crisis. The severity of the shock and the degree of vulnerability matter: big shocks to highly vulnerable systems are a recipe for crisis.

In this vein, the source of vulnerability that I worry about the most is the overextended state of central banks' balance sheets. My concern stems from three reasons.


Many central banks' balance sheet stretched

First, central banks' balance sheets are undeniably stretched. Assets of major central banks-the US Federal Reserve, the European Central Bank, and the Bank of Japan-collectively stood at $14.5 trillion in November 2019, which is down only slightly from the peak of about $15 trillion in early 2018 and more than 3.5 times the pre-global financial crisis level of $4 trillion. A similar conclusion comes from scaling assets by the size of their respective economies: Japan leads the way at 102 percent of nominal GDP, followed by the ECB at 39 percent, and the Fed at a mere 17 percent.

Second, the expansion of central banks' balance sheets is essentially a failed policy experiment. Yes, it was successful in putting a floor under collapsing markets over a decade ago, in the depths of the global financial crisis in late 2008 and early 2009. But it failed to achieve traction in sparking vigorous economic recovery.

Central banks believed that what worked during the crisis would work equally well during the recovery. That didn't happen. The combined nominal GDP of the United States, eurozone and Japan increased by $5.3 trillion from 2008 to 2018, or just more than half their central banks' combined balance sheet expansion of $10 trillion during the same period. The remaining $4.7 trillion is the functional equivalent of a massive liquidity injection that has been propping up asset markets over most of the post-crisis era.


Fed leads the way in upping the ante

Third, steeped in denial, central banks are once again upping the ante on balance sheet expansion as a means to stimulate flagging economic recoveries. The Fed's late 2018 pivot led the way, first reversing the planned normalization of its benchmark policy rate and then allowing its balance sheet to grow again (allegedly for reserve management purposes) following steady reductions from mid-2017 through August 2019.

Asset purchases remain at elevated levels for the Bank of Japan as a critical element of the "Abenomics" reflation campaign. And the recently installed ECB president, Christine Lagarde, the world's newest central banker, was quick to go on the record stressing that European monetary authorities will "turn (over) each and every stone"-which presumably includes the balance sheet.

So why is all this problematic? After all, in a low-inflation era, inflation-targeting central banks seemingly have nothing to fear about continuing to err on the side of extraordinary monetary accommodation, whether conventional (near zero-bound benchmark policy rates) or unconventional (balance-sheet expansion). The problem lies, in part, with the price-stability mandate itself-a longstanding, but now inappropriate, anchor for monetary policy. The mandate is woefully out of sync with chronically below-target inflation and growing risks to financial stability.


Weak real economies exacerbating problem

The potential instability of the US equity market is a case in point. According to the widely cited metrics of Robert Shiller, winner of Nobel Prize for economics, equity prices relative to cyclically adjusted long-term earnings currently are 53 percent above their post-1950 average and 21 percent above the post-crisis average since March 2009. Barring a major re-acceleration of economic and earnings growth or a new round of Fed balance sheet expansion, further sharp increases in US equity markets are unlikely. Conversely, another idiosyncratic shock-or a surprising re-acceleration of inflation and a related hike in interest rates-would raise the distinct possibility of a sharp correction in an overvalued US equity market.

The problem also lies in weak real economies that are far too close to their stall speed. The International Monetary Fund recently lowered its estimate for world GDP growth in 2019 to 3 percent-midway between the 40-year trend of 3.5 percent and the 2.5 percent threshold commonly associated with global recession. As 2019 has come to an end, real GDP growth in the US is tracking below 2 percent, and the 2020 growth forecast for both the eurozone and Japan is less than 1 percent.

In other words, the major developed economies are not only flirting with overvalued financial markets and still relying on a failed monetary-policy strategy, but also lack a growth cushion just when they may need it most.


Modi's 'Hindu agenda' worst form of populism

In such a vulnerable world, it would not take much to spark the crisis of 2020. Notwithstanding the risks of playing the fool's game, three "Ps" are at the top of my list of concerns: protectionism, populism and political dysfunction. An enduring tilt toward protectionism is particularly troubling, especially since the China-US trade war is yet to be resolved. Indian Prime Minister Narendra Modi's "Hindu nation" crusade in that country could well be the most disturbing development in a global swing toward populism. And the great US impeachment saga takes Washington's political dysfunction further into uncharted territory.

Quite possibly, the spark will be something else-or maybe there won't be any shock at all. But the diagnosis of vulnerability needs to be taken seriously, especially because it can be validated from three perspectives-real economies, financial asset prices, and misguided monetary policy. Throw a shock into that mix and the crisis of 2020 will quickly be at hand.

Newsletter

Related Articles

0:00
0:00
Close
UK Unveils Sweeping Asylum Reforms with 20-Year Settlement Wait and Conditional Status
UK Orders Twitter Hacker to Repay £4.1 Million Following 2020 High-Profile Breach
Popeyes UK Eyes Century Mark as Fried-Chicken Chain Accelerates Roll-out
Two-thirds of UK nurses report working while unwell amid staffing crisis
Britain to Reform Human-Rights Laws in Sweeping Asylum Policy Overhaul
Nearly Half of Job Losses Under Labour Government Affect UK Youth
UK Chancellor Reeves Eyes High-Value Home Levy in Budget to Raise Tens of Billions
UK Urges Poland to Choose Swedish Submarines in Multi-Billion € Defence Bid
US Border Czar Tom Homan Declares UK No Longer a ‘Friend’ Amid Intelligence Rift
UK Announces Reversal of Income Tax Hike Plans Ahead of Budget
Starmer Faces Mounting Turmoil as Leaked Briefings Ignite Leadership Plot Rumours
UK Commentator Sami Hamdi Returns Home After US Visa Revocation and Detention
UK Eyes Denmark-Style Asylum Rules in Major Migration Shift
UK Signals Intelligence Freeze Amid US Maritime Drug-Strike Campaign
TikTok Awards UK & Ireland 2025 Celebrates Top Creators Including Max Klymenko as Creator of the Year
UK Growth Nearly Stalls at 0.1% in Q3 as Cyberattack Halts Car Production
Apple Denied Permission to Appeal UK App Store Ruling, Faces Over £1bn Liability
UK Chooses Wylfa for First Small Modular Reactors, Drawing Sharp U.S. Objection
Starmer Faces Growing Labour Backlash as Briefing Sparks Authority Crisis
Reform UK Withdraws from BBC Documentary Amid Legal Storm Over Trump Speech Edit
UK Prime Minister Attempts to Reassert Authority Amid Internal Labour Leadership Drama
UK Upholds Firm Rules on Stablecoins to Shield Financial System
Brussels Divided as UK-EU Reset Stalls Over Budget Access
Prince Harry’s Remembrance Day Essay Expresses Strong Regret at Leaving Britain
UK Unemployment Hits 5% as Wage Growth Slows, Paving Way for Bank of England Rate Cut
Starmer Warns of Resurgent Racism in UK Politics as He Vows Child-Poverty Reforms
UK Grocery Inflation Slows to 4.7% as Supermarkets Launch Pre-Christmas Promotions
UK Government Backs the BBC amid Editing Scandal and Trump Threat of Legal Action
UK Assessment Mis-Estimated Fallout From Palestine Action Ban, Records Reveal
UK Halts Intelligence Sharing with US Amid Lethal Boat-Strike Concerns
King Charles III Leads Britain in Remembrance Sunday Tribute to War Dead
UK Retail Sales Growth Slows as Households Hold Back Ahead of Black Friday and Budget
Shell Pulls Out of Two UK Floating Wind Projects Amid Renewables Retreat
Viagogo Hit With £15 Million Tax Bill After HMRC Transfer-Pricing Inquiry
Jaguar Land Rover Cyberattack Pinches UK GDP, Bank of England Says
UK and Germany Sound Alarm on Russian-Satellite Threat to Critical Infrastructure
Former Prince Andrew Faces U.S. Congressional Request for Testimony Amid Brexit of Royal Title
BBC Director-General Tim Davie and News CEO Deborah Turness Resign Amid Editing Controversy
Tom Cruise Arrives by Helicopter at UK Scientology Fundraiser Amid Local Protests
Prince Andrew and Sarah Ferguson Face Fresh UK Probes Amid Royal Fallout
Mothers Link Teen Suicides to AI Chatbots in Growing Legal Battle
UK Government to Mirror Denmark’s Tough Immigration Framework in Major Policy Shift
UK Government Turns to Denmark-Style Immigration Reforms to Overhaul Border Rules
UK Chancellor Warned Against Cutting Insulation Funding as Budget Looms
UK Tenant Complaints Hit Record Levels as Rental Sector Faces Mounting Pressure
Apple to Pay Google About One Billion Dollars Annually for Gemini AI to Power Next-Generation Siri
UK Signals Major Shift as Nuclear Arms Race Looms
BBC’s « Celebrity Traitors UK » Finale Breaks Records with 11.1 Million Viewers
UK Spy Case Collapse Highlights Implications for UK-Taiwan Strategic Alignment
On the Road to the Oscars? Meghan Markle to Star in a New Film
×