The Lost Decade (10 January 2020)

By Tanya Rawat

Hello 2020! Oppa Gangnam Style! The witty setting of the song is supposedly a mockery of people who are trying very hard to be something that they’re not i.e. pretending to be from the classy district of Gangnam in South Korea.

From 2009-2019, the Monetarists school of economics took on the mantle from the Keynesians and inadvertently ran a rerun of Great Depression (1929) with similarly far-fetching and devastating affects- some of which are still developing.

The year 2019 marked the end of a lost decade (2009—2019), post the most severe financial crisis (2007-08) since the Great Depression (1929), wherein no lessons were learnt from the Great Depression and on the contrary, Keynesianism was ignored while Moneterism i.e. easy monetary policy became the chant of every Central Bank in the world.

This resulted in no change in the velocity of money (GDP/M2) where M2 is used an accurate definition of money supply. This metric shows that despite ultra-loose monetary policies adopted via QE, it hasn’t percolated into economic expansion.

Financial institutions and corporates infact used this opportunity to borrow cheap and achieved artificially high Earnings-per-share via stock buy-backs at the behest of additional lending and/or increased CAPEX. This pushed the equity markets to record valuations and they remain disconnected from the fundamentals and hence extremely fragile in their foundations.

pic1Source: Federal Reserve Bank of St. Louis (

After rising to 2.198 in Q3 1997, the ratio of US Gross Domestic Product (GDP) to money supply M2 fell to 1.433 by Q3 2017. Since then the ratio has bounced slightly to 1.442 in Q3 2019.

This steep decline in the ratio is as an ominous sign for the economy in the months ahead since it raises the likelihood of a sharp decline in the growth rate of prices. This in turn raises the likelihood of price deflation and in turn of a severe economic slump. Additionally, a fall in the ratio raises the likelihood that monetary injections by the Fed are rendered ineffective in the event that the US central bank will attempt to revive the economy once it falls into a real economic slump.


Source: Federal Reserve Bank of St. Louis

Furthermore, we have seen US non-financial corporate debt of large companies grow at 48% of GDP. It now stands at about $10 trillion.


In other words, total US corporate debt is $15.5 trillion, 74% of US GDP. In response, the International Institute of Finance (IIF) in its Global Debt Monitor, has raised caution. According to IIF, US corporate debt growing has been growing above trend, fueled by an increase in bank lending and the US Business Health Index remains weak, driven by growing reliance on short-term debt, deteriorating interest coverage and quick ratios (as a proxy for liquidity), and declining return on assets.

Hello, 2020!

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