We are pleased to present an excerpt from Nomi Prins’s new book Permanent Distortion: How Financial Markets Abandoned the Real Economy Forever. The book tells the untold story of the ever-growing divide between the financial markets and the real economy, and the unprecedented crises it has caused. 

Nomi Prins is a former Wall Street executive who provides valuable insights on how financial systems affect our daily lives. She makes regular television appearances on BBC, CNN, CNBC, MSNBC, CSPAN, Democracy Now, Fox and PBS, and her writing has been featured in many publications including The New York Times, Forbes, Fortune, Newsday, and The Guardian. Nomi is also the author of several best-selling books including Collusion: How Central Bankers Rigged the World and All the Presidents’ Bankers. 

We highly recommend Nomi’s new book and we are thankful to Nomi and her publisher for providing us with this exclusive excerpt

“Prins has done it again. In her newest book, Permanent Distortion, [she] takes a hard look at the conflicts and corruption in the global financial system and banks in particular…. This book is a must-read for anyone looking to understand what’s really behind the financial chaos of the past decade.” – James Rickards, author of Sold Out Order Now Learn More

From PERMANENT DISTORTION: How the Financial Markets Abandoned the Real Economy Forever, by Nomi Prins. Published in October 2022 by PublicAffairs, an imprint of the Hachette Book Group.

The 2008 financial crisis had been ignited by a rapacious US banking system enabled by faulty regulation. Afterward, certain countries sought to distance themselves from US financial hegemony in order to reduce their economic dependence and exposure. Developing economies and their governments sought alternatives to US-dominated monetary, trade, and financial policy. They forged tighter non-US alliances, especially with the BRICS countries, which advocated for a common payment system.57 In that sense, geopolitics between nations began to be colored by a newfound geoprotectionism, to coin a term.

Nations wanted to protect their economic stability from potentially harm-inflicting monetary policies of other countries with which they were otherwise intertwined in the global hierarchy. It was not just the focus on the payment system but the very idea of being able to depend on the United States that was increasingly being called into question. According to a December 2019 Pew Research poll on how people in other countries viewed the US and China—whether as a reliable partner or as a threat—opinion was evenly split, especially in Latin American and sub-Saharan African countries.58 While the US was still seen as an ally in countries like Nigeria, Kenya, and South Africa, nearly as many of those surveyed chose China as a more dependable ally. 

Many of China’s regional neighbors, such as South Korea, the Philippines, and Japan, placed more faith in the US than in the Asian superpower. But among traditional US allies from Canada to Australia, fewer than half of those surveyed held the view that the US was dependable, a significantly lower figure than in 2007. A financial crisis and a trade war will do that to economic and diplomatic relations. Countries that shifted to viewing the US as a threat included Mexico, Turkey, and Argentina. The survey found that the Philippines, Australia, and Japan found China to be the more threatening superpower.

It was China that benefited the most from these shifts. By August 2019, in tandem with its monetary policies, Beijing heightened its use of fiscal policies to boost internal consumption.59 The Chinese government considered it critical to enhance the quality and supply of goods produced nationally and the basic role of domestic consumption in economic development.

Ongoing trade wars had amplified turbulence for international tech companies, export-driven farmers, and international industrial and manufacturing businesses. Even the traditionally right-leaning US Chamber of Commerce opposed punitive tariffs as harmful to the American economy.60 Major US labor unions also voiced serious concerns.61 The turmoil from tariffs hit the poor and working classes the most. As research conducted by economists Jason Furman, Katheryn Russ, and Jay Shambaugh during the Obama administration had shown, tariffs were a regressive tax on lower-income households, single parents, and women, all of whom tend to spend more of their disposable income on imported goods.62 Their report concluded that import taxes are five times more costly for the bottom 10% of households than the top 10%.

A National Bureau of Economic Research report, “The Effect of the U.S.-China Trade War on U.S. Investment,” noted that the March 2018 start of the trade war “did not affect investment until the first quarter of 2019.”63 The report found that the two tariff announcements in March 2018 had “mainly affected equity markets by driving down the returns of firms exposed to China.” It concluded that a more worrying trend was that “four quarters later, the lower returns to capital for exposed firms reduced their incentives to invest” and that this phenomenon led to “a drop in investment growth in the fourth quarter of 2019 of 0.3 percentage points.”

This trade war problem didn’t just affect the United States; it was a transatlantic affair. In October 2019, London School of Economics assistant professor Robert Basedow wrote about the consequences of the US-China trade war for the United Kingdom and European Union. He listed three key challenges the EU faced.64 The first was that this trade war would curtail global growth prospects, pushing the more fragile economies in the EU toward recession territory. Second, because the EU relied upon the World Trade Organization’s framework for trade stability, any external trade war could hurt the EU. Third, broader US-China tensions could result in escalating an already tense geopolitical situation in the Middle East. That could impact European politics, national security, and international migration patterns.

On the flip side, the US-China trade war opened some new opportunities for the EU. Without the United States, China could be forced to rely more on the EU as an export market and as a tech development partner. That would provide the EU a broader negotiating window for investment agreements with China and ensure European firms greater access to still-protected sectors within China, such as financial services, infrastructure, and utilities. As Basedow noted, the EU might also take the opportunity to position itself as an “intermediary between Beijing and Washington to increase its political influence in the world.”

For the United Kingdom, it was a different story. That’s because both the risks and the opportunities it faced were more pronounced than they were for the EU. First, the UK economy had already been undermined by a complex Brexit rollout, and the resulting uncertainty was being compounded by anemic global growth. Second, any reduction of the World Trade Organization’s rules-based governance could hit the UK harder after Brexit, since the UK would be more dependent than larger economies on multilateralism and an open global economy. Without a solid network of free trade agreements, the UK could face harsher global economic competition for years to come. Even as the trade war between the world’s two largest economies depleted global economic growth, two of the largest and most influential emerging-market nations, Brazil and India, saw that war as a possible opportunity to move upward in the global power paradigm. Traditionally, the investor class considered the two main superpowers’ markets as places that could provide them with prime profitable opportunities. A clash presented a chance for others to capitalize on the uncertainty. But doing so would require executing a balancing act between domestic politics, economic backdrops, and people’s sentiments about their own security.

For Brazil, it was economically important to balance trade relations with both China and the United States. President Jair Bolsonaro tended to favor the US and his connection to President Trump over China. When he had taken office on January 1, 2019, the business sector in Brazil did the equivalent of a happy dance. Not being much of a businessman himself, Bolsonaro delegated most financial and economic decisions to his free-marketeer economy minister, the Chicago-trained economist Paulo Guedes. Guedes was a cofounder of the investment bank BTG Pactual and of the right-wing think tank Instituto Millennium. To run the Central Bank of Brazil, Guedes appointed Roberto Campos Neto, another pro-market US-trained economist and trader.

With a government mired in infighting, and a misplaced attempt at state intervention in Brazil’s fuel policy, the economy got worse. The number of people unemployed hit 13.4 million in 2019. In November 2019, the BCB froze rates for the first time after ten consecutive cuts, but Brazil’s GDP rose by a paltry 0.6% in the fourth quarter. The annual growth in the real economy was 1.4%, and there were signs of more decline to come. In contrast, Brazil’s stock market index, BOVESPA, finished up 27.1% for 2019.65

India was a case study of what central banking can and cannot do. India’s GDP grew by just 4.04% in 2019, low by the standards of previous years. The anemic performance led to calls for the Reserve Bank of India, the Indian central bank, to adopt a QE policy to intensify support for the financial system.66 Rate cuts weren’t stimulating the economy or causing banks to increase lending. Instead of purchasing government bonds from banks, though, the push centered around the central bank buying government bonds from nonbanks. This was similar to what the Fed had started doing. The bonds could come from hedge funds, broker-dealers, and insurance companies.

Since those nonbank sellers of bonds didn’t have established accounts at the Reserve Bank of India, they had to deposit any cash they received from the central bank with traditional commercial lenders (in other words, banks). It was a backdoor way to fund major financial players outside of the traditional banking system, instead of just dishing out money directly to the banks. The entire exercise, as was the case in the US, served to bolster money supply without requiring that the banks make any new loans. Rather than alleviating national debt, this was a way for the central bank to help the financial system, infuse money into the banks, and not technically have to borrow as much. The problem was, it wasn’t clear how that brand of QE would help the Indian people.

Meanwhile, Prime Minister Modi’s nationalist stance acted against his global brand and suppressed international support for India as an emerging superpower. To remain a force to his domestic voter base and popular with the global community, especially large countries with significant foreign investment potential, Modi had to walk a fine line. Any extreme policies on the part of political leaders, especially in the major emerging-market nations, had the potential to further destabilize foundational economies as well as the livelihoods of their populations.

India’s NIFTY stock index closed out 2019 with an increase of nearly 13% after a volatile year and a dovish shift from its central bank. The FTSE 100 posted a similar 12% gain. The US stock market, on the other hand, on the back of invigorated dovish policy from the Fed, closed out 2019 with the S&P 500 up 28% and the Nasdaq up 35%.67 The Europe-wide Stoxx index gained 23% for 2019, also on the back of more accommodative monetary policy positioning from the ECB.

Given the on-again, off-again US-China trade war, the Fed stepped in with renewed monetary policies to bolster Wall Street and markets again in late 2019. This began the return to a cheap money policy around the world. Meanwhile, global debt ballooned to a record high of $255 trillion in 2019.68 That amounted to about $32,500 for each person on the planet. That might not sound like much to an affluent European or American, but to the 85% of the global population whose annual income is below $10,000, it is an unclimbable mountain. This economic malaise weighed on sitting politicians and central bankers while fueling voter discontent and pushing electorates toward fresh, charismatic populists as an alternative to sitting conventional political leaders. As a result of central banks’ ample ability to fund and support markets instead of economies, emerging and lesser-developed economies faced more inequality and civil strife.

The financial crisis of 2008 had transformed central bankers from monetary policy bureaucrats into international power brokers. These unelected officials controlled the lifeblood of financial markets—the money. They also had virtually no limits imposed on their ability to buy public debt. Powerful economies became less concerned with domestic inflation because of the newly discovered power to increase their debt cheaply. Politicians moved forward without having to plan for policies that would bring about sustainable economic growth.

Elected leaders did not have to justify the debt. They could allow central banks to call the shots, manipulate money, and dictate how and when money would flow to financial markets, rather than worry about long-term infrastructure plans, societal safety nets, and sustainable economic foundations. The assets acquired through central bank QE weren’t physical assets such as gold, but instead represented an accumulation of mostly debt in the form of bonds. The unlimited manufacturing of money destabilized the real economy. The most vivid representation of the new reality was the billionaire class, which could tap into, create, or gain access to massive quantities of money thanks to rocketing share prices. They could then launch literal rockets, hunt medical unicorns, or simply build extraordinary monuments to themselves. The socioeconomic divide had never seemed more like a chasm.