by Chris Watling
is founder and chief executive of
March 18, 2021
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A 30-year debt
that has fuelled
for a new
On average international monetary systems last about 35 to 40
years before the tensions they create becomes too great and
a new system is required.
Prior to the first world war, major economies existed on a hard
gold standard. Intra-wars, most economies returned to a
"semi-hard" gold standard.
At the end of the second
world war, a new international system was designed - the
Bretton Woods order - with the
dollar tied to gold, and other key currencies tied to the dollar.
When that broke down at the start of the 1970s, the world moved on
to a fiat system where the dollar was not backed by a
commodity, and was therefore not anchored.
This system has now
reached the end of its usefulness...
An understanding of the drivers of the 30-year debt supercycle
illustrates the system's tiredness. These include the unending
liquidity that has been created by the commercial and central banks
under this anchorless international monetary system.
That process has been
aided and abetted by global regulators and central banks that have
largely ignored monetary targets and money supply growth.
The massive growth of mortgage debt across most of the world's major
economies is one key example of this.
Rather than a shortage of
housing supply, as is often postulated as the key reason for high
house prices, it's the abundant and rapid growth in mortgage debt
that has been the key driver in recent decades.
This is also, of
course, one of the factors sitting at the heart of today's
inequality and generational divide.
Solving it should
contribute significantly to healing divisions in western
With a new US
administration, and the 'end' of
the Covid battle in sight with
the vaccination rollout under way,
now is a good time for the major economies of the west (and ideally
the world) to sit down and devise a new international monetary
As part of that there should be widespread debt cancellation,
especially the government debt held by central banks. We estimate
that amounts to approximately $25tn of government debt in the major
regions of the global economy.
Whether debt cancellation extends beyond that should be central to
the negotiations between policymakers as to the construct of the new
system - ideally it should, a form of debt jubilee.
The implications for bond yields, post-debt cancellation, need to be
fully thought through and debated. A normalization in yields, as
liquidity levels normalize, is likely.
High ownership of government debt in that environment by parts of
the financial system such as banks and insurers could inflict
significant losses. In that case, recapitalization of parts of the
financial system should be included as part of the establishment of
the new international monetary order.
Equally, the impact on
pension assets also needs to be considered and prepared for.
Secondly, policymakers should negotiate some form of anchor -
whether it's tying each other's currencies together, tying them to a
central electronic currency or maybe electronic special drawing
rights, the international reserve asset created by
As highlighted above, one of the key drivers of inequality in
recent decades has been the ability of central and commercial banks
to create unending amounts of liquidity and new debt.
This has created somewhat speculative economies, overly reliant on
cheap money (whether mortgage debt or otherwise) that has then
funded serial asset price bubbles.
Whilst asset price
bubbles are an ever-present feature throughout history, their size
and frequency has picked up in recent decades.
the Fed reported in its 2018
every major asset
class over the 20 years from 1997 through to 2018 grew on
average at an annual pace faster than nominal GDP...
In the long term, this is
neither healthy nor sustainable.
With a liquidity anchor in place, the world economy will then move
closer to a cleaner capitalist model where financial markets return
to their primary role of price discovery and capital allocation
based on perceived fundamentals (rather than liquidity levels).
Growth should then become less reliant on debt creation and more
reliant on gains from productivity, global trade and innovation. In
that environment, income inequality should recede as the gains from
productivity growth become more widely shared.
The key reason that many western economies are now overly reliant on
consumption, debt and house prices is because of the set-up of the
domestic and international monetary and financial architecture.
A 'Great Reset' offers therefore 'opportunity'
to restore (some semblance of) economic fairness
in western, and other, economies...