Chuck Prince, the former CEO of Citigroup, who presided over the bank’s collapse, famously remarked in July 2007 that "as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Shortly after, the music stopped, the financial system broke, and Citigroup and other financial behemoths went under.
To rescue the economy and financial system from near‐total meltdown, the government created an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits. It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.
In The Great Reflation we focus on how the authorities pumped air back into the balloon, and got the music playing again. Investors and banks, including Citigroup, are back out on the dance floor. However, just because the system was saved, doesn’t mean it has been fixed.