The law of unintended consequences - the world is now short of everything it needs

The law of unintended consequences - the world is now short of everything it needs

Steen Jakobsen
Chief Investment Officer

Summary:  Governments are spending as much as possible to ensure social stability. There will be consequences.

Every government intervention creates unintended consequences, which lead to call for further government interventions
- Ludwig Von Mises

The main thought bubble for this outlook is that the gargantuan current effort by policymakers to simultaneously solve the three major generational challenges: inequality, the green transformation and infrastructure, will come at a high price in the shape of inflation, a higher marginal cost of capital, and the realisation that they need to be prioritised separately.

The big change in economics and politics since the pandemic has been that, to a greater or lesser degree, governments globally recognise that we have transitioned to an era of fiscal stimulus forever. This sits in diametric opposition to the “frugal 2010s” where most government and central banks fooled themselves into believing that fiscal deficit and monetary policy normalisation were possible. In short, the days of believing that the economy can revive on credit creation through tinkering with the price of money and relying on the banking system and a focus on mere financial stability are over. Monetary policy has nearly killed the real economy patient while taking financial assets sky-high. After years of neglect, the real economy now needs a proper dose of medicine. This means we are undergoing a violent switch in focus by policymakers away from financial stability and toward social stability. Monetary policy is now the mere lapdog of what some have dubbed “fiscal dominance”. 

Fiscal dominance is the response to democracy under attack after decades of rising inequality that has broken the social contract. The Covid pandemic was the straw that broke the previous paradigm’s increasingly vulnerable back, as the response supercharged the “K-shaped” tendency in every recovery since the 1980s, in which the wealthiest and the highest-earning incumbents reaped the lion’s share of the rewards. In the recovery from here, policymakers will focus the bulk of their efforts and stimulus toward rewarding the lower half of economic K, in an attempt to flip the K into a mirror image of itself and close the gap. This has enormous consequences for society and for markets. 

We can call it the Social Stability Paradigm: the model for saving democracy – this is particularly true in the US, where the K-shaped distortions are the worst in the developed world. Simply put, the new mantra is to print and spend as much money as possible while rates and inflation are low. It seems so easy at first, but we need to make sure to reflect on the consequences of this new policy, particularly the unintended ones, like galloping inflationary risks.

Sometimes being old has its advantages, as no one under 50 can even recall what it is like to live in an inflationary world, and no investment professional under the age of perhaps 70 can recall the same.

I was young back then and can vividly remember the Car Free Sundays in Denmark during the OPEC crisis, how my parents struggled to make their payments on their 18% mortgages, and (less so in Denmark than in the US) how the government was constantly raising pay and devaluing the currency. And the income taxes! The marginal tax rate was still 70% in the US until Reagan’s changes in the early 1980s, once inflation was subsiding and the public debt had been devalued by inflation. In Sweden it reached an amazing level of 102% (Astrid Lindgren) in the same time frame.

‘We are getting close to the abyss’ became a cry to action.

The 1970s also saw the end of Bretton Woods, which began breaking down when Nixon fully removed the USD-gold peg in 1971. This moved the world to a fiat money system dominated by the US dollar, which was overvalued. The 1970s inflation ended in the early 1980s with Chairman Volker hiking rates to the moon. Today, there is no such central bank alive who is willing to do that, as it would instantly trigger an enormous reset of asset prices and the real economy, which can only survive at its current level on zero or near-zero rates. So the market will have to do it for them instead. That’s our main message for investors: you are living in a different world now relative to anything you have known in your lifetime.

The ability of low interest rates to help the real economy stopped many years ago, even as it helped pump asset prices to the moon. Now the inequality is becoming a dangerous political problem as greater portions of the population are left behind. Asset inflation will no longer be the name of the game from here, simply because at present, everything that has a cash-flow or even the distant promise of delivering one (think no revenue tech start-ups, etc.) is priced to infinite value because of a zero denominator.

We have no way of turning back now. 

To ensure social stability, the focus will now turn to increasing the income for labour (salaries, redistributive benefits) relative to capital. This will mean higher wage inflation and lower equity returns over time. 

Tangible assets will outperform non-tangible ones, and assets with positive convexity will win (those assets that benefit from rising yields and a global demand in resources) and ultimately we are in the final round of pretending we can solve a productivity/solvency crisis by creating more debt.

Rising supply constraints and excess demand from government into basic resources, driven by the agenda of dealing with the generational challenges of climate and inequality, is the Kryptonite of this “free market”.

Next comes marginally higher interest rates, higher volatility, but also the best macro environment in my lifetime.

We are into the epilogue of this failed model of pretend and extend, and to make sure we go out with a bang the governments have fired up the engines of helicopter money while fooling themselves into thinking there won’t be any unintended consequences.

King Monetary Policy is dead, long live King Fiscal.
Steen Jakobsen


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.