Markets have begun to worry about the massive budget deficit monetization experiment being carried out by the Fed and the Treasury Department through quantitative easing. This approach could overheat the economy and force the Fed to raise interest rates earlier than expected.
NEW YORK – The US economy’s K-shaped recovery is underway. Those with stable full-time jobs, benefits, and financial margin are doing well as stock markets hit new highs. Unemployed or underemployed workers in low value-added service positions – the new “precariat” – are burdened with debt, in poor financial health and worsening economic prospects.
These trends indicate a growing disconnect between the financial and the real economy. The new highs in the stock markets mean nothing to most people: the bottom 50% of the wealth distribution only own 0.7% of total assets in the stock markets, while the Top 10% controls 87.2%; and the top 1%, 51.8%. The wealth of the 50 richest people is equal to that of the 165 million poorest people.
Inequality increased with the rise of the tech giants. Up to three retail jobs are lost for every one Amazon creates and there is a similar dynamic in other sectors dominated by the tech giants, but the current social and economic stress is nothing new. For decades struggling workers were unable to keep up with their neighbors due to stagnant real median income (adjusted for inflation) and rising cost of living and spending expectations.
For decades the “solution” to this problem was to “democratize” finance, so that poor and distressed households could take out more loans, buy houses they couldn’t afford, and then use them as ATMs. This expansion of credit for consumers – mortgages and other types of debt – ended in a bubble that led to the financial crisis of 2008, when millions of people lost their jobs, homes and savings.
The same millennials who were duped more than a decade ago are getting duped again now. Contract workers, part-time or self-employed “jobs” are being offered a new rope to hang on to, called “financial democratization.” Millions of people have opened accounts on Robinhood and other investment apps, where they can leverage their meager savings and income multiple times to speculate on worthless stocks.
The recent GameStop narrative, featuring a united front of very short-term petty speculators at odds with evil hedge funds and their short-selling operations, hides the disturbing reality that a cohort of people without hope, jobs or Skills – and covered in debt – are being exploited once again. Many were convinced that financial success does not depend on a good job, hard work, and patient saving and investing, but on quick riches schemes and betting on assets that lack inherent value, such as cryptocurrencies ( or “shit”, as I prefer to call them).
Make no mistake about it, the populist meme that an army of millennial Davids defeat the Goliath of Wall Street is simply a new scheme to fleece amateur investors who have no idea. As in 2008, the inevitable result will be another asset bubble. The difference is that, this time, the unaware populist members of Congress have gone out of their way to vilify financial intermediaries for not allowing the vulnerable to leverage further.
To make matters worse, markets have begun to worry about the massive budget deficit monetization experiment being carried out by the US Federal Reserve and the Treasury Department through quantitative easing (a kind of modern monetary theory, also described as “throwing money from helicopters”).
A growing chorus of critics warn that this approach could overheat the economy and force the Fed to raise interest rates earlier than expected. Nominal and real bond yields are already on the rise and this has shaken up riskier assets like stocks. Concerned about what an overreaction or “tantrum” would imply to the gradual reduction of quantitative easing by the Fed, the recovery that was supposed to be good for the markets is now turning into a market correction.
Meanwhile, Democrats in Congress are moving forward with a $ 1.9 trillion bailout package that will include additional direct assistance for households, but since millions of people are already behind on their rent and utility payments, and have entered moratoriums for Your mortgages, credit cards, and other loans, a significant portion of those disbursements will go toward debt repayment and savings (probably only a third of the stimulus likely to go to spending).
This implies that the effects of the package on growth, inflation and bond yields will be less than expected and – as the additional savings will end up being redirected towards the purchase of bonds – what should be the rescue of homes in distress in it will actually become a bailout for banks and other lenders.
Certainly, inflation is possible if the effects of monetized fiscal deficits are combined with negative supply shocks to generate stagflation. The risk of these impacts increased due to the Sino-American cold war, which threatens to trigger a process of deglobalization and economic balkanization as countries seek renewed protectionism and the repatriation of their investments and manufacturing operations, but that is a story. for the medium term, not for 2021.
For this year, growth may still fall short of expectations. New variants of the coronavirus continue to emerge, raising concern that existing vaccines may not be enough to end the pandemic. Repeated cycles of rapid alternation of boom and bust measures undermine confidence, and political pressure to reopen the economy before the virus is contained will continue to mount. Many small and medium-sized businesses remain at risk of bankruptcy, and too many people face the prospect of long-term unemployment. The list of pathologies that affect the economy is long and includes growing inequality, deleveraging of companies and workers burdened by debt, and political and geopolitical risks.
Asset markets remain inflated – if we are not talking directly about bubbles – because they are being fueled by super-accommodative monetary policies. But the price / earnings ratio is as high as in the bubbles that preceded the crises of 1929 and 2000. Between increasing leverage and the possibility of bubbles in special acquisition-purpose firms, shares of tech companies and cryptocurrencies, today’s marketplace offers more than enough cause for concern.
Under these circumstances the Fed is probably concerned that markets will crash instantly if it stops funding the party. And as the increase in public and private debt prevents an eventual monetary normalization, the prospect of stagflation in the medium term – and of a sharp fall in asset markets and economies – continues to grow.
The author
Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business and president of Roubini Macro Associates, was a Senior Economist for International Affairs on the White House Council of Economic Advisers during the Clinton administration. He has worked for the IMF, the Fed and the World Bank. His website is NourielRoubini.com and he is the host of NourielToday.com.com.
Copyright: Project Syndicate, 2020
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