In the acknowledgements for her newest book, Permanent Distortion, she refers to her “trilogy” of recent books on these topics. All The Presidents’ Bankers chronicles the development of big banks as wards of the government. (See “Finance According to Non-Academics,” Spring 2015.) Collusion traces how major central banks worldwide have followed the same script on their interventions since the global financial crisis. (See “Colluding with Central Banks, Not Russians,” Fall 2018.) Permanent Distortion picks up where the others left off in explaining the evolution of finance and central bank policies during the pandemic, the inflation those policies begot, and the rapid flow of funds into meme stocks and cryptocurrencies.

Genesis of distortion / Prins begins her introduction in a logical place by explaining the book’s title:

The epic divide between finance and the real economy is what I have defined as a permanent distortion. This is not a phrase chosen lightly. There’s no going back from here. There’s a seismic rift between, on the one hand, economic growth, wages, and a decent standard of living and, on the other, market-driven wealth accumulation that during a devastating global pandemic minted nearly five hundred new billionaires in 2020 alone.

She places the blame for the permanent distortion squarely on the evolving role of central banks since 2008:

Today’s financial system is as unhinged from the realities of classic capitalism as it is from the economy. Central banks have become money dealers and inequality enablers. When faced with crisis, they zoomed past being lenders of last resort to being arbiters of who wins and who loses in the economy. They are now money-creating machines that are fostering riskier and bigger bubbles than ever before. Their policies are setting up future crises and systemic economic fractures…. They have ensured that the markets are destined to collapse without constant support.

Chaotic discussion / Prins sets the scene in her two initial chapters in a section titled “Chaos.” That term, unfortunately, also describes the avalanche of topics covered in the two chapters. The reader is introduced to the concept of a 1920s Ponzi scheme, which segues into a discussion of the Fed’s zero interest rate policy (ZIRP), followed by a historical summary of the size of the debt in ratio to U.S. gross domestic product. That ratio stood at 16 percent as Calvin Coolidge was winding down his time in office, at 118 percent as Harry Truman was in the midst of his first term and the nation began paying off its war bonds, settled at a more manageable level of 30–80 percent for the ensuing 70 years, and then “the ratio zoomed to 136 percent in 2020.”

Prins lays blame on the Federal Reserve as an enabler of deficit spending and in colluding with central banks worldwide:

Central banks’ extreme reaction to the 2008 financial crisis and what’s unfolded since then never had an exit plan. Injecting money into the market whenever a pick-me-up is needed became the norm, not an emergency response…. The big lie was that this money would somehow trickle into the real economy.

Prins then meanders through an onslaught of topics: the inequality effects of the Fed interventions, U.S. GDP growth, the 2008 bailouts during the Great Recession, ZIRP, the 1944 Bretton Woods Agreement, the founding and history of International Monetary Fund (IMF) support programs, convertibility of the U.S. dollar into gold, limitation of banking activities through the Glass–Steagall Act, the growth of the Fed’s balance sheet, the U.S. and European foreclosure crisis, the worldwide rise in populism, the reappointment of Fed chair Ben Bernanke, and Europe’s debt crisis, among others. These early chapters provide the reader with a case of information overload with all these diverse topics, although in some ways interconnected, that do not hold together very well.

Too late to unwind? / The stated commitment by central bankers during the global financial crisis was that all the interventions would ultimately be removed, or as Bernanke put it in 2009, “At some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs.” But as Prins states bluntly in response:

That unwinding never quite came to fruition…. After more than a decade of artificial monetary policy experiments, one thing was clear: central bankers had demonstrated gross negligence…. Ten years of evidence was surely enough to prove their policies had aggravated the gap between the have and the have-nots. These policies had triggered major repercussions, including social unrest, the Brexit vote, the Yellow vests movement in France, and street battles for Hong Kong’s sovereignty.

She summarizes the central banks’ playbook as follows:

The resumption of central banks’ almost-free lending of magically created money marked a point of no return. It confirmed the fact that no matter what the problem, the Fed’s solution was to chop rates and buy more securities. The reliance of banks, markets, and governments on central bank artificial interventions had become … addictive. The markets could not dare face the reality of returning to a world of normal markets. The dependence on cheap money was too deep. It was during this period of extravagant monetary policy that the perverse relationship between financial markets and the real economy became permanently distorted.

Pandemic distortions / The second book in Prins’ trilogy, Collusion, was released in 2018. Subsequent events, i.e., the COVID pandemic and the central banks’ response, led her to update her story of how central banks cooperate to create global monetary policy. She writes in Permanent Distortion:

Some remedies did soothe people’s immediate financial problems. But the extravagant deployment of central bank money sent long-term trends of inequality and asset bubble growth into the stratosphere. The pandemic aggravated the existing distortion between the real economy and the market in the same way that scratching off a scab can result in a permanent scar. It shifted more wealth away from average workers and toward financial elites, who were already amply armored…. The exogenous shock to the financial system caused by the coronavirus spurred central bankers to take “extraordinary action,” which to them meant following the same old playbook.

Even the rhetoric of central banks during the pandemic had the same feel as that relied upon during the global financial crisis. Christine Lagarde of the European Central Bank spoke of the need to deploy programs and borrowing “by as much as necessary and for as long as needed.” Current Fed chair Jerome Powell spoke of there being “no limit” to the Fed’s commitment to do “whatever it takes for as long as it takes.” The collusion Prins described in her previous book continued unabated: “With respect to monetary policy, in the COVID-19 era the symbiotic relationship among central banks, major governments, large private banks and the financial markets continued as it had previously.”

Surprise! Inflation / It should have been to no one’s surprise that the relentless decade-plus of loose money would lead to an increase in inflationary pressures. Prins traces the evolution of the Fed’s inflation narrative from initial questions in January 2021 when Powell belittled the suggestion of inflation as “too low to be material to policy.” By April 2021 and later that spring, the Fed began to recognize inflation pressures as “substantive,” but said they were “transitory” as the economy recovered from 2020’s short but sharp COVID recession. During the summer of 2021, those outside the Fed, such as the managing director of the IMF, began suggesting that building inflation might require “earlier-than-expected tightening of US monetary policy.” Finally, in November 2021, Powell admitted that he would “retire the term ‘transitory’ and … the Fed might begin to wrap up its asset purchase programs.”

Prins describes what then happened in a volatile 2022:

The Fed was caught between another rock and hard place of its own making. Again, the Fed had articulated no exit plan at the onset of the pandemic. So when it signaled a series of rate hikes, markets reacted with stomach-churning choppiness. Trying to serve two masters, the markets and the economy, had again shown itself to be an approach that would never self-correct without pain for both, which became increasingly apparent as 2022 unfolded.

Convincing closing / The final chapters address the timely topics of meme stocks and cryptocurrency and how both phenomena had their genesis in the upheaval and permanent distortion present since 2008. Prins attributes the burst of interest in meme stocks to a desire to bypass the “established Wall Street corridors” and “a clearly rigged system” and the rise of the hyperactive “retail investor.”

The movement began with “direct payment applications” such as Cash App and Venmo, which facilitated peer-to-peer transfers without relying on an established bank. The movement really took off with the introduction of the Robinhood app. Prins writes:

No longer was investing relegated to Wall Street and the mega asset managers that didn’t always get it right. It was time for more of Main Street to play its hand…. With such epic support given by the Fed and US government to the largest banks and corporations, it was no wonder those left behind not only questioned why, but finally decided to organize, mobilize and push back.

Robinhood’s user base exploded from 2 million in 2017 to 13 million at the depths of the pandemic during the middle portion of 2020.

Permanent Distortion was released in October 2022, so the book was drafted well before the FTX crash, the major cryptocurrency story of 2022. Still, Prins takes on crypto. She explains that Bitcoin was intended to challenge central banks, as

an alternative value-storing and payment system [that] … could operate independently from the centralized monetary system controlled by central banks and major commercial institutions…. [It] was born in the wake of the financial crisis of 2008 and took flight when the pandemic struck in 2020.

Prins puts in context the present significance of crypto: “If there was one invention that symbolized the era of permanent distortion, it was cryptocurrency.” With the worldwide uptick in inflation, trust in central banks and their ability to manage fiat currencies began to wilt and was at a decades low. Cryptocurrencies provided an alternative:

The idea was that the trust in governments, and by extension the activities of their central banks, that underscored fiat currencies would be replaced by trust in bits, bytes, and math … [replacing] the continuing cycles of financial crisis, central bank mission creep, [and] Wall Street bailouts…. [Bitcoin] was introduced as an idealistic alternative to the status quo, on its way to becoming a practical one.

Prins closes the chapter with a question that holds true in the wake of the recent FTX collapse and vague efforts to halt or ban crypto: “Given the undeniable might and legacy of the established monetary system, even if it evolves digitally, the question remains: can cryptocurrencies and central-bank-created digital ones coexist?”

Conclusion / To sum up Permanent Distortion: the book gets off to a slow start but it has a strong finish. If a reader can get past the early explosion of topics, some central to the narrative but others not so much, and is patient enough to wait out Prins’ storyline on inflation, meme stocks, and cryptocurrency, the late chapters hold together well. The endnotes are very detailed (70 pages) and would be very useful for central bank researchers.

Permanent Distortion is not my favorite of Prins’ trilogy; that honor would go to All the Presidents’ Bankers. But the new book is a good capper for her history that spans the global financial crisis through the pandemic and its aftermath.