That’s according to Mohamed El-Erian, chief economic adviser at Allianz and chair of Gramercy Funds Management, who warned in a Financial Times op-ed that a decades-old “policy put” is vanishing.

Until recently, monetary policy and fiscal policy were often employed when stock markets crashed, eventually causing investors to expect policymakers to come to the rescue.

“This has deeply conditioned market psychology, with many investors viewing volatility not as a signal of fundamental developments, but as a virtually automatic buying opportunity,” he wrote.

This belief is part of the reason why market selloffs no longer last very long, El-Erian added, pointing to the rapid stock rebound after the Iran war began, even as the Strait of Hormuz remains effectively closed.

For now, AI stocks and hundreds of billions in capital expenditures from hyperscalers are fueling markets, while investors look past shrinking real incomes and plummeting consumer confidence.

But high inflation, elevated interest rates, and soaring debt limit the ability of central banks and lawmakers to respond to downturns, El-Erian warned.

“While the willingness to shield markets may endure, the capacity to do so is less,” he said.

Indeed, several Federal Reserve officials have sounded the alarm on stubborn inflation, which has surpassed their 2% target for five years, indicating they are prepared to hike rates if prices don’t start cooling off soon.

Central banks in Japan and Europe have raised similar concerns as the Iran war spikes global energy prices that are spilling over to other parts of the economy.

And on the fiscal side, the ability to spend more via deeper deficits has evaporated in most developed economies, El-Erian said

“The higher borrowing costs feed directly into larger government interest expenditures, while simultaneously threatening tax revenues as growth is hampered,” he explained. “This fiscal vulnerability has awoken the long-dormant ‘bond vigilantes.'”

That dynamic has been seen in the U.S., where recent bond auctions drew weak demand as investors balked at exploding deficits, surging debt interest costs, and plans to boost defense spending by nearly 50%.

The disappearing policy put has implications for the real economy as well as for financial markets.

In the event of a recession, when deficits widen, the U.S. may have to issue greater volumes of fresh debt at higher yields, creating a doom loop of costlier interest expenses and even worse deficits. Meanwhile, the Fed will be torn between fighting inflation via rate hikes and supporting the job market via rate cuts.

Emerging markets face an even more dire situation as governments have depleted fiscal resources and currency reserves, raising fears of capital flight and more financial instability.

El-Erian sees the global economy in the midst of a “bumpy, structural recalibration” as its traditional security blanket fades away. In its absence, policymakers must look to AI-driven productivity gains, deeper capital markets, and smarter fiscal policies.

“For markets, such strategies are inherently less direct than a ‘policy put,'” he said. “So investors will have to live with more complex structural uncertainty for a period of time.”