This is the second part of this essay. Part one can be found here.
In the first part of this essay, we discussed the unique fiscal and economic circumstances that will surround the next market crash, whenever it may come. In particular, we saw how governments already straining under record peacetime debt burdens, competing for increasingly scarce savings with other sovereigns and a capital-hungry private sector, will find themselves more constrained in their ability to respond to a crisis than they have previously been. Today, we will explore how private actors and the state might respond to such an impasse — and examine the possibility that our future is one of financial repression unlike anything seen before in the West.
Capital flight in a digital financial system
Once investors begin to doubt the real return available on sovereign liabilities, the speed with which they can respond becomes important. Modern financial wealth can be reallocated almost instantaneously. An investor dissatisfied with cash or government bonds can move into foreign equities, commodities, gold, property funds or another currency without waiting for wages, consumer prices or conventional money velocity to adjust. Monetary distrust can therefore appear first as a portfolio movement rather than as an immediate surge in spending on goods. This makes attempts to suppress sovereign yields potentially less stable. The wider the gap between the return investors believe they require and the return governments are willing to permit, the stronger the incentive to move elsewhere. In earlier periods, geographical, institutional and technological frictions slowed that process. Today, capital can react to a deterioration in expected real returns within seconds.
Yet the same financial system which makes capital extraordinarily mobile also makes it more governable than previously. Most private wealth sits inside intermediaries such as banks, pension funds, brokers, and custodians. In Britain, for example, an investor generally retains the beneficial ownership of securities held through a nominee structure, but their transfer and settlement nevertheless occur through institutions subject to government regulation. The state therefore does not need to locate individual banknotes or prevent investors physically crossing a border in order to influence the movement of capital.
This creates a paradox: capital has never been easier to move voluntarily, but it has also rarely been easier to control administratively. Of course, sufficiently strong restrictions create powerful incentives for investors and firms to find ways around them (called ‘disintermediation’), but they substantially lower the administrative cost of the first stages of financial repression. If attempts to hold sovereign borrowing costs below their market-clearing level provoke increasingly rapid movement into foreign or non-sovereign assets, governments have both a stronger incentive and a greater technical ability to prevent that escape. The monetary problem can thereby become a problem of capital freedom, and we’re already seeing it take form.
What would financial repression look like today?
Financial repression need not begin with capital controls, compulsory bond purchases or confiscation. In a modern financial system it is more likely to arrive incrementally, through changes in the relative attractiveness of different assets. A government can encourage domestic savings, promote investment in national infrastructure, alter pension regulations, or give tax advantages to favoured securities. Each intervention may have an independent justification. Taken sufficiently far, the state ultimately comes to determine where private savings are expected, encouraged or, eventually, permitted to go.
Britain has already started down this path, although current policies should not themselves be confused with the much harder repression envisaged here. Gilts, for example, already receive favourable treatment because gains on qualifying British government securities are exempt from Capital Gains Tax. More significantly, the government has become increasingly interested in the allocation of Britain’s enormous pension pool. Defined-benefit schemes already hold substantial quantities of British government debt, often through liability-driven investment strategies using leveraged gilt exposure. Rising yields can create acute collateral and liquidity pressures for such strategies, as demonstrated in 2022. Under the 2025 Mansion House Accord, seventeen major defined-contribution providers, representing around 90% of active defined-contribution savers, voluntarily committed to place 10% of their main default funds into private markets by 2030, with at least 5% earmarked for UK investments. The Government estimated that the commitments could ultimately redirect more than £25 billion specifically into Britain. It subsequently legislated for a reserve power allowing ministers, under specified circumstances, to impose quantitative investment targets if voluntary changes prove insufficient. The present objective is productive investment rather than financing the gilt market, and pension schemes retain fiduciary obligations to their members. Nevertheless, the tools exist for the asset allocations of millions of savers to effectively become an instrument of state diktat. Post-war France, Japan and South Korea all provide historical precedents for this.
There is, however, an important limit to this power. As one might expect, financial repression changes behaviour. If regulated banks, pension funds etc are forced to offer inferior returns, capital has an incentive to migrate towards less regulated institutions. Post-war Britain repeatedly encountered this problem as restrictions on the clearing banks encouraged the growth of finance houses and other non-bank lenders, while attempts to restrict those channels simply pushed activity further towards the regulatory fringe. Governments can keep widening the perimeter, but suppressing disintermediation completely eventually requires increasingly intrusive control over ordinary lending, contracting and investment. Beyond a certain point, financial repression therefore begins to interfere with the basic mechanisms of a capitalist economy.
Britain has done something considerably harder before. Exchange controls introduced during the Second World War survived until 1979, long after the immediate emergency had passed. By the final years of the regime, British residents were still restricted in their ability to use official foreign exchange for outward portfolio investment and purchases such as foreign holiday homes. The Bank of England’s own history of the system confirms that controls were intended to prevent funds from leaving the country except for approved purposes and to reserve scarce foreign resources for uses considered to be in the national interest. The abolition of those controls in 1979 became one of the foundations of Britain’s subsequent development as an open international financial centre.
A return to anything comparable would therefore carry a cost that goes well beyond the inconvenience imposed on individual investors. London’s importance rests heavily upon the assumption that capital can enter and leave, property rights will be respected, and investors will not suddenly be trapped inside sterling assets simply because doing so has become convenient for Our Andeh. Hard repression would attack precisely that reputation. Even the expectation of future controls could encourage pre-emptive capital flight. The more aggressively a government tries to retain capital after confidence has begun to weaken, the greater the risk of accelerating the very process it is trying to prevent.
This is why a ‘boiling frog’ style progression of government policy makes the most sense. The first phase would probably be almost indistinguishable from ordinary industrial and financial policy such as tax incentives or pension reforms. If investors responded by moving capital through less regulated institutions or instruments, the natural response would be to widen the regulatory perimeter. A more severe fiscal deterioration could lead to explicit attempts to channel institutional capital towards government debt or to penalise foreign holdings. Only in a serious confidence crisis would restrictions on foreign exchange, outward transfers or foreign securities become plausible. Such measures would almost certainly be justified in the language of temporary financial stability rather than permanent capital control. But Britain’s own sordid historical experience shows how measures introduced as responses to an emergency can survive for decades.
Britain is particularly vulnerable
Britain combines weak underlying growth with a highly financialised economy, large sovereign financing needs and an exceptional dependence on the continued willingness of both domestic and foreign capital to hold British assets. The country’s post-2008 productivity record has been particularly poor. ONS estimates show that output per hour grew by about 2.2% annually in the decade before the financial crisis but by only around 0.4% annually during 2010–19; by the final quarter of 2025, output per hour was only 2.4% above its 2019 average. This is important because weak productivity limits the least painful route out of a debt problem.
The underlying current-account deficit, excluding volatile precious-metals trade, was £15.1 billion in the first quarter of 2026, equivalent to 1.9% of GDP; including precious metals it was 2.8%. That is why the recent emigration of wealthy residents is so disastrous, especially after the abolition of the ‘non-dom’ status with its tax advantages, and can be only expected to continue. Henley & Partners and New World Wealth estimated a net outflow of 10,800 dollar-millionaires in 2024 and 16,500 in 2025, compared with a net outflow of only 1,500 in 2016. The methodology has been disputed; these are modelled estimates based on investable wealth and inferred changes in residence rather than direct counts. Nonetheless, the direction of travel is clear; Britain appears to have moved from being a significant magnet for internationally mobile wealth to a substantial net exporter of it. This creates a particularly awkward starting point for any future attempt at hard financial repression. China established capital controls before accumulating the financial imbalances it now manages, which is partly why Chinese bond yields are bucking the global trend by declining to record lows; British policymakers would be attempting to restrict capital after building an economic model around its freedom of movement, and after having already lost a significant amount of capital, more than any other nation proportionate to its size.
When every government wants the same savings
Financial repression of the type described above would become more consequential when it ceases to be an isolated national response and begins appearing across several major economies simultaneously. One highly indebted country can suppress its borrowing costs while allowing dissatisfied capital to move elsewhere. The problem becomes much harder when several large sovereigns are competing for the same pool of internationally mobile savings.
Previous sovereign crises generally occurred within a wider financial system containing relatively credible external refuges or institutional backstops. During the euro-area crisis, for example, the ECB ultimately demonstrated that it was prepared to prevent self-reinforcing sovereign-market panic from destroying the currency union, even after stress had spread beyond Greece, Portugal and Ireland towards much larger economies such as Spain and Italy. But if the United States, Britain, continental Europe and Japan increasingly confront fiscal pressure at the same time, there is no equivalent sovereign balance sheet standing above the developed-world system as a whole. In practice, the closest thing the system has possessed to such an anchor has been the United States itself: issuer of the dominant reserve currency, provider of the deepest pool of safe assets and destination of last resort for global capital. The difficulty is that the country supplying the refuge is now becoming part of, or rather central to, the problem.
The result is potentially a non-cooperative game theoretical scenario. Policies which appear rational from the perspective of an individual government can make the international system less stable when pursued by everybody simultaneously. Capital can initially be ‘mobilised’, ‘aligned’, ‘redirected’ or encouraged towards ‘productive national investment’, while capital increasingly loses the neutrality with which it usually moves.
China occupies a different position because it enters this process with much of the relevant machinery already established. Capital controls continue to apply to most capital-account transactions, the banking system remains heavily influenced by the state and domestic savings are exceptionally large. Beijing consequently has considerably greater ability than Western governments to retain savings within the domestic financial system. This may make China comparatively resilient to precisely the kind of rapid capital flight that would complicate attempts at Western financial repression.
Yet, the same discretionary control which helps Beijing retain domestic capital makes the renminbi difficult to imagine as the universally trusted reserve asset of a genuinely open international financial system. Not to mention, of course, the unpleasant distortionary effects at home; the Chinese property market seems to in part be a consequence of trapping excess savings which can’t be put to productive use in the country. China therefore cannot easily offer foreign investors both unrestricted monetary refuge and the degree of administrative control over capital which gives its own system its present resilience. Despite China’s enormous role in global trade, the renminbi still represents only a small fraction of world official reserves and international transactions, and this will not likely change anytime soon.
The possibility is therefore not that China replaces the United States at the centre of the existing system, but that, worryingly, no sovereign does. If several Western governments increasingly seek to direct domestic savings while investors remain unwilling to entrust the same monetary discretion to China, the world loses some of the obvious sovereign escape valves which made earlier episodes of repression easier to contain. Capital would then have stronger reason to seek claims whose value does not depend upon the willingness of any single government to preserve an adequate real return.
The competition for savings has arguably already started. Norway’s $2.3 trillion sovereign wealth fund, one of the largest pools of capital in the world, has proposed reducing the government-bond share of its fixed-income benchmark from 70 to 50 per cent. Because US Treasuries are its largest sovereign holding, at roughly $215 billion, they would bear the largest absolute reduction. Reuters estimates that implementation could cut the fund’s Treasury exposure by almost $80 billion. Expect others to follow with time.
Where will the capital go?
The obvious candidates are equities, property, foreign assets, commodities and precious metals, but none provides a perfect escape. Each represents a different compromise between liquidity, political exposure, valuation risk and the degree to which the asset remains inside the regulated financial system.
Equities are likely to absorb a large share of the initial movement because they are liquid, familiar and represent claims on nominal revenues rather than fixed nominal payments. A company with pricing power or ownership of scarce productive assets can often adapt to inflation more readily than a bond whose return is fixed in advance. This is one reason an inflationary or repressive regime need not produce an immediate bear market in equities even when valuations are already stretched. If the alternatives are cash yielding less than inflation and sovereign debt deliberately prevented from offering an adequate real return, expensive equities can remain attractive, and rationally so. Their valuations may become still more extreme in nominal terms, particularly where investors expect policymakers to respond aggressively to any serious market decline.
Property performs a similar role, but with greater friction. Land and buildings are real assets, rents can rise with inflation and mortgages fixed in nominal terms can become easier to service in real terms. Yet property is highly taxable, immobile and visible. A government seeking revenue or attempting to discourage the hoarding of capital outside productive investment can alter property taxes, transaction taxes, planning rules or rental regulation easily. Property may therefore remain an inflation hedge while simultaneously becoming an increasingly convenient target for fiscal policy; the looming prospect of a ‘mansion tax’ in Britain is one such example, as are rent controls, which are not implausible in Andy Burnham’s Britain. Although an extreme example, The Weimar inflation warns against assuming that the physical reality of a house necessarily protects its owner. German rents had been price-controlled close to pre-war levels, so as the mark collapsed landlords increasingly found that regulated rental income no longer covered taxes, repairs and maintenance. Many were consequently forced to sell into a market dominated by buyers with access to hard currency. Stefan Zweig famously recalled that, near the height of the inflation, a substantial Berlin house could be bought for roughly $100, less than five ounces of gold at the contemporary gold price. One documented Berlin town house valued at approximately $100,000 in 1914 reportedly changed hands for only about $500 in hard-currency terms in 1923, a decline of roughly 99.5 per cent when measured in dollars or gold. Property had risen spectacularly in paper marks while simultaneously being almost annihilated as a claim on real purchasing power.
In terms of immobility and visibility, foreign assets have a similar risk; they are among the easiest categories to penalise administratively because they pass through banks, brokers, custodians and foreign-exchange markets. The main problem with corporate bonds has been explained previously; they are fixed claims whose real value can be eroded by inflation, which is more likely given the low probability of outright default risk. Their attraction in a repressive regime is therefore likely to depend on whether the additional spread over government debt compensates sufficiently for both inflation and credit risk.
Cryptocurrency appears to offer a more radical alternative, but the distinction between Bitcoin and stablecoins is important. Bitcoin has no sovereign issuer and its supply cannot be expanded at the discretion of a central bank, giving it a genuine form of monetary neutrality. Yet its extreme volatility, short history and absence of widespread official acceptance make it difficult at present to imagine as the principal reserve or final-settlement asset between states.
Dollar stablecoins are almost the opposite. The GENIUS Act requires regulated payment stablecoins to be backed one-for-one by highly liquid dollar assets, including short-dated Treasury securities. A saver can therefore exchange conventional dollars for a token which circulates globally while the issuer holds Treasury bills and similar assets behind it. Far from necessarily allowing capital to escape the American monetary system, widespread adoption can create an additional mechanism for financing it. Treasury Secretary Scott Bessent has explicitly argued that stablecoins will reinforce the dollar’s reserve-currency status and increase demand for US Treasuries, while estimates of the possible first-round increase in Treasury-bill demand by 2030 range from hundreds of billions to more than $2 trillion depending upon where stablecoin adoption draws its funds from. Stablecoins should therefore be understood less as an alternative to the dollar-Treasury system than as a technological extension of it.
There is, however, one asset — gold — whose monetary characteristics are importantly different. It is globally traded, physically scarce, held directly by central banks, carries no issuer’s promise to pay and does not simultaneously constitute somebody else’s debt. That is why gold provides perhaps the clearest test of whether the movement described here is simply another speculative asset boom or a repricing of the monetary system itself.
Why gold is different
Unlike a bank deposit, bond or share, physical gold is not another institution’s liability and does not require a continuing promise of payment to retain its existence. A Treasury bond depends upon the United States honouring a dollar claim and a share represents a legal claim mediated through a corporate and custodial mediator. An ounce of bullion remains an ounce of bullion regardless of the solvency of the issuer because there is no issuer. That characteristic becomes more valuable as financial repression increasingly concerns not merely investment return but control over the location and form of private savings.
Modern portfolios contain surprisingly little of it. The World Gold Council estimates that privately held investment gold represents only about 3% of global financial assets, compared with roughly 14% around four decades ago. Yet the entire above-ground stock is remarkably small by the standards of modern finance: about 220,700 tonnes, worth roughly $31 trillion at end-2025 prices. Central banks and other official institutions themselves hold around 38,600 tonnes, or nearly a fifth of all above-ground gold, while bars, coins and physically backed ETFs account for roughly another 23%. New mine production increases that stock by only about 1.8% annually. A comparatively modest reallocation from the hundreds of trillions of dollars represented by modern financial claims could therefore produce a very large change in gold’s price at the margin without requiring anything resembling a wholesale abandonment of stocks or bonds.
Recent events suggest that gold’s monetary role has not disappeared. Central banks have accumulated an average of roughly 1,000 tonnes annually over the past four years, around twice the average pace of the preceding decade. In the World Gold Council’s 2026 survey, 89% of responding reserve managers expected global official gold holdings to increase during the following year, while a record 45% expected their own institution to buy more. This shows that the institutions responsible for managing sovereign reserves continue to regard an asset without an issuer as useful during uncertain times.
For the private investor, the distinction between gold exposure and possession of gold may become important under harder repression. A gold ETF can reproduce the financial return on bullion extremely efficiently, but it remains a security held through brokers and custodians. Its tax treatment, transferability and permitted ownership can therefore be altered in much the same way as those of other securities. Directly held bullion is different. Governments can tax gold, regulate dealers, impose disclosure requirements, restrict its movement and, in extreme circumstances, compel surrender; the American experience of 1933–34 demonstrates that physical ownership is certainly not beyond sovereign power. Nonetheless, there is a good case to be made for the idea that possession of an asset itself may acquire a premium of its own over a digital claim.
The importance attached to physical custody is also becoming increasingly apparent among Western central banks. In 2026 the Dutch central bank reduced the share of its gold held in New York from 31 to 18.5 per cent while sharply increasing its London holdings, explicitly citing geopolitical unrest and geographical risk diversification, or, in simpler terms, the need to make its reserves more readily usable during a severe crisis. France went further in 2025, eliminating the remaining 129 tonnes of its gold held in New York and replacing it with equivalent bullion in Europe. The Banque de France describes the latter principally as a technical exercise to replace bars which no longer met its preferred trading standard, and neither institution has suggested that it doubts American custody. But recent events makes the jurisdictional dimension difficult to ignore. The freezing of Russian central-bank reserves demonstrated that foreign reserves remain ultimately subject to the legal authority of the country in which they are held, while the United States itself has historically shown, most dramatically in 1933–34, that legal treatment of gold can radically change in an emergency. The Dutch explanation of greater crisis preparedness is therefore not really separate from the question of confidence, as part of the value of physical gold in a geopolitical crisis lies precisely in knowing where it is and how quickly it can be mobilised without counterparty risk. In other words, it’s worth wondering if they even trust the US to keep custody of their assets.
Physical gold is in an interesting position because attempting to suppress it too aggressively risks strengthening the very monetary significance that governments would presumably wish to deny. Gold no longer has an official role, with the gold standard being scrapped over 50 years ago. A government which suddenly sought to prevent its citizens exchanging sovereign liabilities for physical bullion would therefore face the question: if gold were merely another commodity, why was it sufficiently threatening to require exceptional restrictions?
In 1933, when gold’s monetary status was explicit, restrictions formed part of a wider attempt to alter the dollar’s relationship with it. In a modern fiat system, confiscation of privately held bullion (leaving aside their digital intermediaries such as ETFs) would itself identify gold as a monetary competitor. The measure intended to suppress demand could consequently advertise the reason for holding it. A further difference now versus 1933 is that a lot more bullion is stored in neutral jurisdictions such as Switzerland and Singapore, putting it out of reach of more financially authoritarian governments.
These factors do not make physical bullion immune from government power, of course, but changes the political cost of exercising that power. Financial wealth via custodians and brokers is easy to target; pursuing dispersed private bullion may yield relatively little additional control while requiring a far more overtly coercive intervention. The advantage of physical gold is therefore not that governments cannot control it, but that doing so may require them both to expose the extent of the repression and, paradoxically, to reaffirm gold’s monetary importance.
Gold’s weakness, that it produces no cash flow and finances no productive enterprise by itself, becomes less important when the question is not how to maximise ordinary investment return but what asset can settle a claim without replacing one government’s liability with another’s, or indeed a corporation’s. That does not imply a return to gold coins circulating in shops or banknotes redeemable on demand for a fixed quantity of metal. The more plausible question is whether gold could recover a narrower role that it once performed extremely well; not as everyday money, but as the politically neutral asset sitting beneath a credit system when trust between the issuers of that credit weakens i.e. a means of final settlement — a way for governments to settle any trade or financial deficits without inflating it away.
Nor, indeed, would a renewed role for gold mean restoring the classical gold standard. The modern credit system solved genuine limitations of a rigid specie regime. Commercial banks can create credit elastically, central banks can supply liquidity during crises, and businesses can finance investments whose scale would be impossible if every transaction required prior accumulation of metal. The enormous expansion of credit over the past century contributed to real innovation and economic growth even as it also enabled increasingly large debt cycles. The relevant question, as posited by financial analyst Alasdair Macleod, is therefore whether gold could return underneath this credit structure rather than replacing it; for example, not at 100% M2, but maybe at 20%. Macleod’s insight here is that gold can discipline credit without itself being the everyday medium through which the majority of transactions occur. A future system might continue to use pounds, dollars, euros and bank credit domestically while giving gold a larger role in settling persistent imbalances.
What would prove this wrong? Is the situation salvageable?
Any argument about monetary regime change risks becoming unfalsifiable. If stocks rise, that can be called inflation; if they fall, the crisis has begun; if bond yields rise, that suggests fiscal stress; if they fall, repression. The thesis advanced here should therefore be abandoned if Western governments prove capable of restoring fiscal sustainability while continuing to allow markets to determine sovereign borrowing costs and capital to move freely.
The clearest disconfirmation would be a durable improvement in public finances. Sustained primary surpluses, unexpectedly strong productivity growth or sufficiently rapid expansion of the tax base could stabilise debt without forcing governments to suppress yields. Likewise, if long-term bond yields rise to politically uncomfortable levels and governments nevertheless allow them to remain market-determined, particularly while inflation is above target, the central argument put forward in this article becomes substantially weaker.
The opposite pattern would strengthen it. Repeated intervention whenever sovereign yields become painful, pension funds or banks increasingly directed towards favoured domestic assets, progressively worse treatment of foreign investment, or restrictions on investors escaping negative real sovereign returns. No single policy would prove the case. What would matter is accumulation in one direction. Governments must restore fiscal credibility, preserve positive real returns, and tolerate market-determined borrowing costs without recurrent intervention.
Political implications
A world of scarcer capital, increasingly captive domestic savings and governments competing to secure resources would naturally revive economic nationalism across the political spectrum. The important division would no longer be simply between those who favour or oppose a larger state, but between competing answers to the question of who should bear the cost of maintaining the state when growth can no longer painlessly finance its promises? Left-wing policies presented as national, ‘patriotic’ renewal could equally become vehicles for higher taxation, directed investment, price controls (i.e. a tax on producers) or the transfer of private savings towards politically favoured uses (or indeed politically favoured people, such as their own voters). The language of sovereignty, resilience and national investment does not by itself tell us whether the policy beneath it is productive. Right-wing political movements that concentrate exclusively on ‘culture-war’ issues risk discovering too late that the decisive battles have moved elsewhere. As restrictionist positions on immigration and other social questions become increasingly mainstream, we should expect the Left to appropriate parts of the rhetoric of nationalism for fundamentally different ends, even as the institutional consequences of multiculturalism and the fiscal burden that comes with it become even more deeply entrenched. The conclusion to draw from this is that the fiscal, not social, effects of immigration need to be hammered home much more than they are. Deal with the tangibles before the tangibles deal with you.
In the short-term, however, energy and food shortages are a huge risk. European governments are already preparing their populations for the possibility of prolonged disruption. The EU now explicitly advises households to maintain at least 72 hours of essential supplies (the British government has advised 96 hours), and is expanding strategic stockpiles and civil-military preparedness through, I think unrealistic, prospects of conscription. None of this proves that a wider war with Russia is inevitable, but it does normalise the expectation that rationing and reduced living standards may have to be endured in the name of national security. For now, it is something that European governments are keeping in their back pockets if the worst-case scenario comes to pass.
In other words, it is a potential smokescreen, a veneer of exogeneity to excuse the remarkable incompetence of European governments’ net zero agendas which have left us particularly vulnerable to supply shortages. The continent has spent years allowing refining capacity to decline, increasing its dependence on im ported energy and assuming that external suppliers would remain permanently available. The EU still relies on imports for the majority of its energy needs, while Norway and the United States now account for an outsized share of its gas and oil supply. Europe’s share of global diesel refining has collapsed from 23% to 12% in just a few decades. A future government facing shortages of fuel, energy, or food would therefore have an obvious political temptation to attribute the resulting hardship entirely to war with Russia, or even use it to bring about the capital controls and rationing that only martial law could excuse. Those factors may well be real, but they would not explain why Europe entered the crisis with so little resilience. War can create scarcity, but it can also provide a convenient explanation for vulnerabilities accumulated long before the first shot was fired. Europe’s natural gas storage facilities are currently only 70% full as of late September, much lower than at this stage in previous years. In a harsh winter, we should consider shortages or ‘brownouts’ to be likely.
Conclusion
The point of this article is not to predict a sudden return to 1923, 1929, 1971 or 2008 (although certain parallels can be made with 1971). History rhymes, certainly, but it does not repeat so neatly. Most importantly, losses cannot ultimately be abolished. They can only be recognised and corrected, redistributed or disguised. If governments increasingly choose the latter two, the defining financial event of the coming decade may not be the crash everyone has spent years anticipating, but the birth of a new set of economic circumstances which would follow. Stagflation may merely be its first visible manifestation.
A further danger is that the origins of inflation become increasingly difficult to disentangle as American fiscal dominance increases. If war, energy shortages, disrupted trade and agricultural failures are already raising prices, the inflation caused by subsequent monetary expansion is difficult to gauge, which may cause a large time lag in how households respond. Supply-side inflation and monetary inflation ultimately appear together in the same consumer prices, wages and nominal GDP. Policymakers may therefore find themselves tolerating, or adding to, inflation that can continue to be explained publicly by genuine external shocks. This misdirection would be convenient for, even if unintentional on behalf of, those same policymakers. But those setting policy and those living under it ultimately rely on the same price signals for economic information. As governments seek to pull the wool over the public’s eyes, they may soon find themselves driving in the dark.
This article was written by Harry Yew, a Pimlico Journal contributor. Have a pitch? Send it to submissions@pimlicojournal.co.uk.
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