The Nomad Economist
Premiered Oct 30, 2021
Overstimulating the economy to fill the crater they created with money has brought so much demand forward that the inevitable reversal of this trend will be stupendous, particularly deflation in durable goods as demand drops off. That is, if inflation is not larger than the coming drop in demand. Maybe that’s the plan.
I think our leaders have totally screwed the pooch on this one. They will all say they had no choice and no one could have foreseen the consequences of their actions when the economy comes completely unraveled.
The historic stimulus from $5 trillion in government deficit-spending and from $4 trillion in Fed money-printing within a 16 month period resulted in a historic spike in consumer spending on goods. When the demand shock hit retailers and other companies, they were suddenly confronted with a multi-layered supply shock – after decades of corporate efforts to tighten “lean inventory” strategies ever further, all the way up the supply chain. And there was no buffer for the disruptions.
I can almost see the rationale for the stimulus back in March of 2020, when they thought that people would spend the extra money to keep businesses alive, but it turns out that people just used it to splurge on durable goods from large multinationals. Once they saw actual behavior, doing it again in December, and then again in March of 2021, was beneath contempt.
They learned from 2002 and 2008. Timid intervention results in a bear market in stocks.
But right now, stimulus is wearing off and interventions are coming to an end. This is the time the Fed needs to aggressively ramp up QE, and yet they’re talking about tapering.
They knew a year ago that they had stimulated too much and needed to cut back, but the fear was that even a hint of tapering would crash markets. The market only wants to hear about more stimulus and more QE, so the obvious solution was to announce one year ago that QE would be stopped immediately, but that they would gradually increase the pace of asset purchases going forward. That way, they might have been able to create a more sustainable recovery.
The unemployment bonuses, rent moratoriums, forbearance programs, etc haven’t even rolled off yet and various commodities already look like they’re crashing. Now that they’ve made the mistake of doing too much fiscal stimulus, is there even any way to withdraw it gracefully?
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