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FEBRUARY 2017 by MICHAEL E. LEWITT

Objects In Mirror Are Closer Than They Appear

newsletterthumbfeb2017William White is one of the few policymakers who foresaw the 2008 financial crisis. Understanding the pathologies that led to the global financial crisis, Mr. White today rejects the intellectual errors that mislead so many mainstream economists, pundits and officials regarding the current state of the global economy. In a recent speech, he criticized consensus economic thinking and warned that, for all the hoopla surrounding Donald Trump’s ascension to the presidency, insufficient attention is paid to the precarious state of global finances. Mr. White argued that “the fundamental analytical mistake has been to model the economy as an understandable and controllable machine rather than as a complex, adaptive system.” As a result, the decision to solve a debt crisis by printing tens of trillions of dollars more debt2 means that “the situation we face in late 2016, both in the advanced economics (AMEs) and the emerging market economies (EMEs), is arguably more fraught with danger than was the case when the crisis first began.” He added, “[b]roadly speaking, the levels of prices in financial markets today look as stretched as they did in 2007 just before the crisis erupted.” The global economy is much more leveraged today, central banks’ are running out of policy responses, and the geopolitical landscape is more stressed than at any time since the end of the Second World War. I would go further than Mr. White’s warning, however; global bond markets are in an epic bubble and stock markets are quickly catching up.

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“The fundamental ontological error has been to model the economy as a relatively simple machine, whose properties can thus be known and controlled by its policy operator. In reality, it is an evolving system, too complex to be either well understood or closely controlled. Moreover, it is a system in which stocks and ‘imbalances’ build up over time in response to monetary stimulus. This reality makes future prospects totally path dependent, and we are on a bad path.” William White1

The Credit Strategist newsletter has been published monthly since 2001 by Michael E. Lewitt and read by the financial elite as well as media, thought leaders, and policymakers around the world. The commentary has been featured in The New York Times, Barron’s, Bloomberg, Forbes, USA Today, PBS Newshour, The New Republic, and El Mundo.