If you’re wondering how we got into this mess, Viktor Shvets explains it well 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.

Macquarie Bank’s New York-based strategist says we are living through the consequences of a Fujiwara Effect, where two or more cyclones join together to form one big one.

The three cyclones in his narrative are: Neoliberalism, financialisation and the information age.

I interviewed him at length about the book last week, and he told me: “We are currently at the precipice of the most profound disruption … the fourth major turning point that in a matter of decades will reshape every human society as profoundly as anything that’s happened since at least the 15th century.”

Neoliberalism

First, Shvets sees neoliberalism as an outcome of Baby Boomers’ longing for freedom and independence, “coloured 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”.

But as Viktor writes in his book: “the greatest irony of the most ardent proponents of neoliberal ideas [is] that their theories – though wonderfully modelled – failed to reflect how human societies work”.

People will never tolerate this volatility in their life, they will never tolerate the inequalities and if they don’t find the right answer from existing parties, they will start looking at extremes.

Technology

Second, technology is disintermediating both capital and labour, altering the function and meaning of both.

Shvets quotes a McKinsey study that found what’s happening is 300 times the scale and 10 times the speed of the Industrial Revolution, which means the impact is 3000 times as great.

“It reduces marginal cost of everything to zero and when marginal cost declines, average cost follows, that creates disinflationary pressures.”

Financialisation

And third, financialisation was kicked off by then Federal Reserve chairman Paul Volcker in the late 1970s and early 1980s, who deliberately created a system which relied on debt and the global circulation of capital.

Volcker expected that currencies would eventually rebalance their economies but that never happened because most countries would not allow their currencies to reflect the clearing prices. What we ended up with is significant distortions, with anglo-Saxon US and UK perpetually running deficits, Germany, Japan, China and Korea perpetually running surpluses.

As Shvets told me in the interview: “In the past we only needed maybe $1 to $1.50 of debt per every dollar of GDP. Today we need more like $3 to $4. The value of financial assets is at least $500 trillion, and it could be as much as $1000 trillion – anywhere from 5 to 6 to 10 times global GDP, perhaps more.”

‘Cloud of finance’

The result, says Viktor, is a “cloud of finance”. If you create a cloud of finance which is 5 to 10 times larger than underlying economy “then finance is the dog … and real economy is (the) tail”.

The objective of central bank policies is simply to make sure that the dog is not sitting on a tail because there is just too much capital floating around, which could create massive displacements for the real economy, as in the GFC.

One of the things the cloud of finance does is lubricate technological progress because the more capital you have, the lower cost of capital is, and the faster technology propagates.

But what came first, according to Shvets, was the neoliberal revolution.

‘New gilded age’

Shvets told me this is basically the idea that “public sectors are inherently inefficient, public sector has no way of getting all the meaningful prices in order to make decisions, appropriate decisions.

“Public sectors quite often are unjust in what they do and how they do things and therefore the best thing to do is to leave it to the private sector. The private sector has much better visibility of market prices, allocates capital more efficiently and generally provides more efficient and better answers.”

But that didn’t mean that government spending as a percentage of GDP fell, just that the governments were hamstrung, and for 30 years government functions were degraded and budget deficits increased. It also hamstrung the government in responding to financialisation, and the ability to address inequality.

“We have created a new gilded age, but productivity has not improved. Meanwhile monopolistic powers increased and so did financial volatility.

“The way I look at it is that Baby Boomers brought in a neoliberal revolution, that in turn created financialisation, which turbocharged the human spirit of innovation and inventiveness that you find in the information age.”

Backlash

The backlash against neoliberalism started even before the GFC but has become more extreme since then.

Industrial policies are now being discussed everywhere and more generally the state is playing a more significant role in society, “because it is needed in order to re-establish societal consensus, reduce polarisation and reduce geopolitical pressures”.

The Millennials and Generation Z are taking over, and their views, says Shvets, are more in line with the great grandparents’ than their parents or grandparents.

In most countries they represent 35 to 40 per cent of adults, soon they will be in absolute majority. As a result, the consensus will be much closer to 1950s-60s than it will be to 1990s-2000s, in other words a more constrained world in social and economic areas, a government much more pervasive across all aspects of economy.

Extremes in retreat

He ended the interview on a positive note, saying that the extremes are in retreat.

“Brothers of Italy, PBB in Netherlands, RN in France are no longer advocating exit from European Union or Euro, or taxes on the banks or cuts in welfare – all of that was rejected. They’ve just become social conservative but from an economic point of view they are relatively moderate.”

Likewise in the US, where the Republicans have already disowned Project 2025, the aggressive program designed to emasculate the government and virtually eliminate the professional bureaucracy.

I felt like interjecting that they, especially Trump, might be lying about that, but he was on a roll.

Anyway, his broad point is correct, which is shown by the rapid rise of the Democrat candidate Kamala Harris in the polls, suggesting that a lot of Americans want someone else to vote for who is not Donald Trump. Trump says Harris is a communist, but her program is not very radical at all.

As Viktor says: “the good news right now is that electorate is not yet mad enough, is not yet angry enough to burn down the house the way they were in 1930s.”

Could they become more extreme in future? They could, which is why the next decade will be one of the most critical and one of the hardest periods of transition from neoliberal capitalism to whatever the future would look like.

I would add that it’s also the reason the Federal Reserve is so keen to cut interest rates, to ensure that unemployment doesn’t rise any more – that it, and the Reserve Bank of Australia is as focused on the employment part of the mandate as inflation.

They are acutely aware of the propensity towards cultural extremism if the economy doesn’t provide jobs and prosperity.

Alan Kohler writes weekly for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor