It is said that while throwing money at an issue will not solve it alone, it will usually make the solution easier to find, this thinking seems to have been the mantra adopted by central banks all across the world while battling the COVID19 pandemic induced financial meltdown of 2020. While the continued trend of elevated stimulus and easy money monetary policy is not a new one, it has taken its current form over the past 20 years through a continuously lax interest rate environment and most recently, added liquidity from central banks. The ‘cash crunch’ that is routinely supposed to occur during times of bust for the economy is no more, at least the current administrations in power around the globe will not allow it, and for that reason, markets continue to rally and further disconnect themselves from the underlying reality that is the economy, this phenomenon will be the subject of this week’s blog post in the first edition of a series on the economy and stimulus.

The economic report of August came in and while GDP advanced from the new lows caused by the shutdown, the unemployment rate decreased as well to 8.4%. Notably, COVID19’s ‘low’ is still higher than the peak unemployment rate of 2008, being 7.2%. Further to this fact is that the rate of employment is only half of the harsh picture directly facing many, which is that in spite of all this stimulus, and added government benefit, real wages continue to be at a low. Along the same timeframe that elevated levels of stimulus kept the overworked market churning and reaching higher highs, the inflation-indexed cost of living continued to disconnect from the rate at which real incomes were growing. So while on paper, everything has been going well and people have been buying homes at a record rate, they haven’t really been affording homes; more and more are individuals heading into retirement with mortgage debt, or students graduating with hundreds of thousands of dollars worth of student loans and becoming burdened consumers within our capitalistic system.

Not only is the above the case, but the stock market is morphing into a different beast as well that does not follow any of the conventional truths being taught in econ classes all across the world, it is becoming disconnected from the real efficient flow of capital and the cash conversion cycles meant to occur within a functioning society. There are many tells pointing towards this fact. Chiefly, the rising price of gold is historically meant to act as an uncertainty gauge in the economy, same as the level of the VIX, which measures stock market volatility, both of which hit all-time highs in March, during the onset of the pandemic. Additionally, the Federal Reserve has maintained that they will continue to pump capital into the markets and buy corporate bonds to support what they say is the appreciation of equity prices, but is also argued by others as the mispricing of them. Following this trend, a sector of the economy has emerged as a power-player of its own, the technology space. With all of the added stimulus and liquidity crowding the market, coupled with the fact that in the new work-from-home digital environment, these companies would have been able to stand high on their own two feet anyways, they are absolutely dominating and have many thinking of them separately from traditional sectors on the stock market.

Through all of this, a fact remains and that is that the economy has prolonged facing a period of depression yet again, but the question now is for how long? The strenuously heightened amounts of public debt on the head of virtually all leading economy-countries is a ticking time bomb and the only word that comes to mind in thinking of this impending issue is ‘austerity’, what will this look like, and what does this mean? For that, you will have to join us next week where we will bring the second installment of this series on everything to do with the economy, thank you for reading.