Money & Markets: It’s metaphor bingo! No one knows how this is going to go...

As the world’s economies buckle under the strain of the coronavirus lockdowns, can financial engineering stop the worst recession ever seen?

When it comes to systems, simplicity is essential. Any functioning system has to be as simple as it can possibly be; ad hoc lash-ups are impractical, unsustainable and prone to utter failure. If you can make an engine go only by constantly nursing it, then it’s essentially broken.

This is the state of the markets as I write. To hold back the consequences of the global and local lockdowns, the world’s governments, their proxies and agents are buying up all assets. They have, at the very least, seriously damaged their economies.

Look at it this way. If your head is held under water for 30 seconds, you come up for air relieved that you don’t have to hold your breath any longer. If you are under for a minute, you will break the surface gasping and desperate for air. If it’s two minutes, you are dead.

You wouldn’t be thinking like that if you scanned the media. It is certainly clear that things are going to be rough but to steal an old joke, “if you are not panicking, you clearly don’t appreciate the seriousness of the situation”.

Board members of the Bank of England can say the recession is going to be the worst in 300 years. 300 years seems pretty huge but it pre-dates the industrial revolution. So what that suggests is we are in for the worst recession of the Industrial Age. Yet no one seems to connect that statement with an economic environment worse than the 1930s, 1970s or parts of the 1800s. The Atlanta Federal Reserve can talk about a possible drop of 50 per cent of GDP and yet no one starts predicting Armageddon, as the media moaned on about after the credit crunch.

The cognitive dissonance says as much for the severity of what might unfold. The sounds you hear are the shuffling of deck chairs on the Titanic.

It is understandable that people are looking at the stock market and feeling that it can’t be so bad; the markets have stabilised and recovered a bit. In the US, the tech stock index, the Nasdaq, is back at near-highs, which were extremely high before the virus struck. How bad can the situation be?

What people are not told is that countries are by hook or by crook nationalising their bond and equity markets. The markets are no longer free because they are being bought up by the globe’s central banks either directly or by and through proxies.

This is Quantitative Easing (QE) or New Monetary Theory or just plain WIT (Whatever It Takes) theory. The idea is, the governments buy assets from the private sector. Cash goes into the system and assets go to the state. Sounds like nationalisation... and it is. That cash goes into outstanding assets and pools there, in assets which are attractive because they are artificially supported by new money supply and a buying of constant resort. The money is sumped in these bonds, stocks and houses so it doesn’t get spent creating inflation in other things. People get wealthier but it’s not too liquid so the money only leaks slowly into the broader economy.

The result of this financial engineering? The rich get a handout in the form of asset inflation of stocks and bonds, which prop up corporations, which prop up taxes and pensions and employment. The middle classes get the handout in the form of house price inflation and well-paying jobs. The largesse goes to the workers as ample and decent employment and the poor get social benefits to keep a roof over their head and some opportunity for upward mobility.

Everyone gets a fat bailout from QE. There are downsides but who cares about them as long as the merry-go-round goes round.

QE was big, but now it has grown like a horror movie ‘thing’ into a massive, all-consuming, overwhelming blob. Meanwhile, government debts are going to balloon, and the only way to service debt and keep it affordable will be yet more QE.

So there go the irradiated economies of the developed world, gobbling on the iodine of debt to try to save the organs of their societies. It may not work.

So what is the cure? What financial wizardry is going to prevent another hundred years of austerity?

The answer is, of course, inflation. Inflation is the silent resetter of hard and harsh to solve economic conundrums. It strips down the machine of the economy, knocks out the trusses and props, bores through the channel of business, all at a chronic pace.

People understand acute, but they don’t get chronic. They do not react to millions awaiting cancer treatment, but are distraught at hundreds dying on their front page in the morning. Inflation will be the silent reaper of this disaster, and in the end, like countries at the end of the Second World War, governments bereft of income will be carrying the ownership of vast and perhaps valueless assets that no one else wanted to have as their economies slide below the icy waters.

Let’s hope I am horribly wrong.

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