Like an earthquake rocking a house, the 2008 global financial crisis exposed a shaky new foundation underpinning Western economies. Just look at Europe, where cascading debt crises have made paupers of once-proud countries, where long-term joblessness and high youth unemployment have dulled the hopes of both recent university graduates and those nearing retirement, and where unusually wide income inequality has heaped social unrest atop financial turmoil.
This is part of what my colleagues at Pimco and I labeled a few years ago as "The New Normal." But something has changed as this crisis has continued. The systemic instability we saw then has continued to morph, fast and furious: The vicious feedback loops that turned bad economics into bad politics now convert bad politics into even worse economics, further threatening an already tenuous economic future.
Not so long ago, we used to think only of developing countries -- in Africa, Asia, the Middle East, and Latin America -- as the places where severe economic dissatisfaction fuels populist movements that sweep aside governments and sometimes even overthrow long-established ruling elites. Those were the old days. An increasing number of Western countries are now also in the grip of a similar dynamic. And the longer politicians and policymakers lag the realities on the ground, the greater the likelihood that markets will add to growing global insecurity. Indeed, for the first time in a very long while, our children's generation may be worse off than ours -- economically, financially, politically, even socially. Welcome to The New New Normal.
Even the United States is not immune from this disturbing phenomenon. The country is now in the midst of a bitterly contested national election, and for the last few years political bickering and brinkmanship have replaced virtually all efforts at the bipartisan compromise that is central to America's well-being.
The degree of political polarization has been so extreme as to undermine normal governance. Passing an annual budget should be a routine task; these days, it's a high-wire political drama, where politicians seem more likely to turn off the lights in Washington and walk away than to negotiate, much less compromise. And the partisan games can get out of control, as illustrated by last year's debt-ceiling debacle, which threatened a U.S. default and pushed Standard & Poor's to downgrade America's sacred AAA sovereign credit rating. Already, the upcoming fight over the $607 billion "fiscal cliff" of automatic spending cuts and tax increases set to go into effect next year -- a potentially devastating hit to an already sluggish economy -- is starting to roil markets, and rightly so.