A century ago, the fiscal and monetary policy created the illusion of prosperity, and speculation boosted the bubble further. The outcome was a major disaster. So do we really think that the trillions of dollars spent now on supporting the economy will create sustainable prosperity, David Folkerts-Landau asks in his article on finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
The quick development of highly effective vaccines and, of course, expectations of huge fiscal stimulus in the U.S. had made investors optimistic about global growth.
However, their hopes were recently dampened as vaccination campaigns were slow to start and, in Europe, experienced supply problems. Furthermore, concerns about more infectious COVID mutations have led to prolonged and more restrictive lockdowns which have weighed on business and consumer sentiment.
«Consumers can hardly wait to return to restaurants and bars, go shopping and travel»
Still, the darkest hour of the night is just before dawn. By the beginning of summer at the latest, rising vaccination numbers and warmer temperatures should drive down infection rates and prop up sentiment. Consumers can hardly wait to return to restaurants and bars, go shopping and travel. When this occurs, pent-up demand will combine with unprecedented monetary and fiscal stimulus as the two move in lockstep.
Fiscal programs drove up global debt by $19.5 trillion in 2020 and more programs are being drafted to lift overall growth and pull the most affected sectors of the economy out of their pandemic-related slump. They also seek to ensure the necessary transition to a digital and sustainable economy.
«As in the 1920s, the markets are already attracting increasingly speculative retail investors»
Central banks are doing their bit, too, by extending their mandates further and monetizing higher government debt by providing liquidity. This policy mix works like a drug. As the global pandemic is overcome, we will probably see similar market euphoria as back in the «roaring twenties». There are already some indications that this has begun; just look at the significant, broad market index gains which appear to have left firm ground.
As in the 1920s, the markets are already attracting increasingly speculative retail investors. World trade has already exceeded its pre-COVID level and ship charter rates are going through the roof. This, and ballooning demand, will increasingly cause liquidity to spillover from the financial markets to the real economy.
The upswing is likely to continue until 2022
In turn, multiplier effects should massively boost growth. The upswing is likely to continue until 2022. However, as inflation expectations rise, doubts about the sustainability of the uptrend will surface. This might ultimately cause a dip in both equity and bond prices.
A century ago, the fiscal and monetary policy created the illusion of prosperity, and speculation boosted the bubble further. The outcome was a major disaster. We like to believe that we have learned from the past. So do we really think that the trillions of dollars spent on supporting the economy will create sustainable prosperity?
Once inflation spirals out of control and interest rates rise, the party will be over. And the question of who is going to pay will be just as difficult to answer as it was a hundred years ago.
David Folkerts-Landau is a German economist, university lecturer and author. He has been chief economist at Deutsche Bank since 2012, succeeding Thomas Mayer. He studied mathematics and economics at Harvard University and received his doctorate in philosophy from Princeton University in 1978. He then taught at the Chicago Business School for three years and worked as a capital markets expert at the International Monetary Fund (IMF). In 1997, he moved to Deutsche Bank in London. With a fortune of 350 million euros, he is one of the 500 wealthiest Germans.
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