Something very unusual has happened to the US economy over the last two decades.
The system that once drove economic growth no longer works the way it used to. And yet, despite that shift, the economy has continued to expand and wealth has surged to unprecedented levels.
That raises an important question: what is really driving growth now?
To answer that, we need to look closely at the Federal Reserve’s Flow of Funds data. It provides a comprehensive view of how credit is created and where it is flowing within the economy—and it reveals a structural change that has gone largely unnoticed.
At the same time, asset prices have climbed to levels that are difficult to explain using traditional frameworks, pushing household wealth to extraordinary heights. That has helped sustain economic growth, but it also raises questions about how durable that support really is.
Now, a new risk is emerging.
The war with Iran poses a serious threat to the current drivers of economic growth. By pushing up oil and food prices, it is likely to increase inflation and keep interest rates higher than expected.
In an economy this dependent on elevated asset prices, that shift could have profound consequences. If financial conditions tighten, the result could be a sharp reversal in wealth—potentially destroying tens of trillions of dollars of wealth and triggering a recession far more severe than most anticipate.
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