Thinking Markets Are Simple Might Be Costing You Money 3
Reductive thinking is also widely used in financial forecasting. Examples abound daily in the financial media where statements that follow the same seductive Because of A , B will happen formula.
“Sell the USD because of QE!” Not true, see our QE Series for a more in depth look.
“Inflation is coming because of QE!!”. Also not true.
And finally, “Fiscal stimulus will save the economy!”, but… will it? Is an economy so simple as to just require government spending to be saved?
Unfortunately for these forecasters, it isn’t.
Firstly, fiscal stimulus is an injection of government cash into corporate America that will help businesses stay afloat for a while longer as the pandemic rolls on. The cash will also help businesses not fire their employees, which is the government’s way of propping the labor market up.
All this is well and good, but what happens when the money runs out?
Of course, the hope that the government has is that economic growth can rebound enough by then to keep the workers on payroll and make businesses profitable again. Essentially, they are buying time. Will economic conditions improve enough by the time stimulus money runs out?
No one can say for sure, but looking at the devastation wreaked in the labor market, it is highly doubtful. The massive amount of jobs lost makes it difficult for companies to take them all back into the labor market quickly enough.
This is due to companies needing time to regain confidence before expanding their operations again. Also, the lost jobs have already led to sharply reduced disposable income and spending, which directly reduces companies sales and thus their ability to rehire workers.
That’s just the labor market side of things.
There is also the credit aspect, where companies, especially those who do not have access to capital markets, struggle to get banks to loan them money. Because, just like with household stimulus checks, one off government payments are not future cashflow.
This means the stimulus does not really help them to get bank loans. No bank loans means no new capital investment, no new hires, and no increase in the money supply in the economy.
What started out as one factor has now morphed into multiple, interlinked factors
It’s not all bad for government stimulus though. It can be made to work, but for this to happen, the stimulus needs to be constant, direct spending in the economy, just like in WW2, where the government boosted the economy with its massive military spending.
The problem here is of course, how long can the government keep this up, and does the political appetite for this exist in both the legislature and electorate?
If this road is taken and the government decides to stop at some point in the future, the problems listed above will hit home again, except now the private sector is much smaller in size having been crowded out of the economy by the government!
So, will fiscal stimulus save the economy? It’s complicated (or should we say complex)!
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