Awash in liquidity: keeping economies afloat, but sinking equality and sustainability?

Following the 2008 financial crisis, central bankers deployed a new tool to reassure panicking financial markets: quantitative easing (QE).

Coined under the rubric of “unconventional policy measures,” quantitative easing amounts to central banks purchasing equities and debt to lift asset prices on financial markets. With interest rates on the floor, QE was seen as the next best way to avoid further market contractions and collateral damage from economic recession.

QE also presented a relatively painless way of injecting resources into an economy without going through the legislative or executive decisions required to implement fiscal policies – and creating conditions for lower cost borrowing. But opportunities to invest at scale in strengthening foundations for long-run sustainable growth and resilience were largely missed.

Fast forward 12 years: with the onslaught of COVID-19 and the ensuing global lockdown, governments have once again been forced to flood their economies with cash to keep them afloat. Together with our partners at Oxford, we recorded over USD 17 trillion in spending commitments by governments since the start of the crisis.

Sadly, however, less than 20% of this record-breaking spending can be qualified as “green” or sustainable; most were simply cash injections to keep businesses running and incomes flowing.

Quietly, in the background, central banks also did their job: injecting the equivalent of US$9 trillion in QE during the same period – bringing the total to US$25 trillion since 2008.

So far, so good? In effect, this combined injection of fiscal and monetary stimulus has kept economies open and helped economies in the global north avoid the worst: large and permanent recessions, sustained mass unemployment, so-called economic “scarring.”

But at what cost?

With all the liquidity sloshing around in financial markets, stock valuations have risen to stratospheric levels, with a handful of tech and other companies reaching capitalisation of over US$ 1 trillion – often with little or no relationship with actual earnings or supporting fundamentals.

Worse, as stock markets effervesced, the gap between rich and poor has widened. Countries unable to exert monetary sovereignty or weighed down by debt have struggled to shield their economies from the ravages of COVID-19. Meanwhile, within high income countries inequality has risen to levels not seen since before World War II. According to data from the World Inequalities Lab, the share of global wealth possessed by the top 10% has risen to 76% of the total during the COVID-19 pandemic. In fact, 2020 marked the steepest increase in global billionaires’ share of wealth on record.

At the same time, those investments most urgently needed – in the energy transition, in the high impact sectors of the economy with the largest climate, nature and pollution footprints – have been delayed.

Here we come to great irony of this moment: we are told that moving towards a green economy is too expensive, prohibitively so, and could negatively affect the poor most adversely. Yet, two years into the largest fiscal and monetary injection in a generation, we see trillions of dollars being deployed to support capital markets and prop up business-as-usual.

Not only does this flood of liquidity increase income gaps and inequalities, by investing in business as usual it also entrenches existing high-carbon industries and institutions, further exacerbating the difficulty of addressing the triple planetary crisis of climate instability, nature loss and rising pollution.

What are we to do, on the doorstep of 2022?

2022 marks the fiftieth anniversary of the Stockholm Conference on the Human Environment, and the creation of the UN Environment Programme. An auspicious time to reflect on how we are investing our time, talent and resources in the future we want and will need to survive and thrive.

So here are our top picks for 2022 – things we can do to shift the needle away from the red lines:

• Taper down – and as you do, stop buying business-as-usual. When the next crisis rolls along - as they always do - use policy to advance sustainable transitions (i.e., Green QE or targeted cash vouchers for sustainable goods and services), and critically examine the effectiveness of QE to support economies in a fair and equitable manner.
• Rachet up and customize – mainstream taxonomies that support green finance, including nature and climate disclosure and customize at national and sub-national levels based on country contexts
• Soften the landing – extend debt holidays for those countries most impacted by the downturn and strengthen debt transparency and use of funds disclosure as early warning systems. Seek ways to cushion the rate rise that is coming, that will increase the debt burden.
• Turn a corner – reconvert existing debt into green financing mechanisms using carbon and nature swaps; support new financing for building transition pathways, such as the IMF proposal for a new Resilience and Sustainability Trust of SDR 50 billion.
• Invest relentlessly in the transition – including sustainable infrastructure that will underpin the transition in high impact industries; and in education and skills to power the economy of tomorrow.
• Use a new lens to reassess public finance outlays in light of possible impact to create jobs while advancing countries on transition pathways that mitigate the climate, nature and pollution crises. Building out from the Global Recovery Observatory, we are working with partners at Oxford to develop a sustainable budgeting approach to make sure every penny counts.
• Embrace the digital transition – and close the digital divide – and use the power of big data to increase informed personal spending choices and the transparency and rewards of green businesses.

We are eight years away from the tail end of the 2030 Agenda; we are 500 Gigatons of CO2 emissions away from breaching the 1.5ºC threshold that scientists say marks a line between stability and increasing chaos in climate. We will need every penny, and every minute, to realign ourselves to the challenge.

Which leads us back to the beginning – the wash of finance that is sloshing through global markets, inflating bubbles, widening disparities, and putting us on a collision course with climate, nature and pollution outcomes. As countries start to reel in and taper, they can equally reflect on how to keep investment moving in the direction needed to secure a safe and equitable future.

And that goes beyond simply turning off the taps – to a conceptual pivot that includes a realistic assessment of investment needs and smart value for money in public and private expenditure. Because sustainability and social equity are as important to our future as stable economies. Indeed, they are the bedrock of stable economies and societies, regardless of how the waters ebb and flow.

Steven Stone is the Deputy Director, Economy Division at the UN Environment Programme. Himanshu Sharma is a Sustainable Fiscal Policy Advisor at UNEP-WCMC. The views presented in this article are those of the authors and not necessarily those of UNEP.