In this post, I will reflect on the management of the COVID-19 crisis by authorities, financial institutions, and central banks. Some aspects are bizarre. The reactions of central banks and government were similar in the world. Are there better alternatives?
It is difficult to answer these questions, especially when we are still in trouble. However, it is also true a year and a half has passed, and some things are clearer.
I do not want to assess the correctness of lockdown decisions because there are few alternatives if science does not give answers.
States have acted in the same way in the first place with social distancing. It was necessary to limit infections and people’s freedoms to prevent the collapse of health care systems. But I would like to examine the financial management of the crisis because it is incomprehensible from many perspectives.
Central banks worldwide have started printing money, and governments are distributing it to the population. The debt has soared disproportionately. I’m not saying it was a mistake, but how do we get out of it now?
The graph I posted above clearly shows an unprecedented increase in US federal debits since 2020. It was like a race to see who distributed the most money, believing that we had to stop a short-lived episode.
The most serious mistake of governments and central banks is to have underestimated the duration of the crisis.
I think it was taken for granted that the Covid-19 pandemic would disappear within a year, and therefore it was possible to raise debt, and then the economic impact could be huge in the long run.
What could central banks have done differently to cope with the covid crisis? Was it the right choice to print all this money?
An obligatory decision due to low interest rates
Liquidity injection was an obligatory decision because, in the previous financial market crisis of 2007, it was impossible to intervene in the United States on interest rates.
Interest rates were already close to zero, and for a while, their rise was being considered. The main task of the Fed is to control inflation and then keep it under control by interest rates.
For years, when a rate hike was proposed, the stock market reacted in a sprawling way. So politics has always tried to please Wall Street and always helped to remove the specter of tapering.
Following the 2007-2008 crisis, it was possible to return to normal in a short time by intervening in interest rates. Indeed, many economies have accelerated to produce wealth that has never been seen before. I don’t know whether we can talk about a stock market bubble, but it was still a drug and anabolic market.
In the 1980s, for many, the role model was Gordon Gekko with his motto: “Greed is good.” Gordon Gekko’s philosophy is still alive today.
I don’t think things have changed much since then. An unprecedented 12-year economic growth cycle is a symptom of greed.
And if things go wrong, all that remains is debt and postponing the problem, here a symptom of stupidity. I don’t guess it was stupid to take debt to stop the Covid crisis. It was to keep interest rates low for so long, hoping for luck.
The Covid-19 crisis has arrived. It could have been a solar storm or an explosion of a supervolcano. Every family should save by taking disease or an unforeseen event into account, as should the states.
The consequences of a massive liquidity injection
Finance and the economy have rules that rules cannot improvise. So if it was impossible to intervene on interest rates, the Fed and other central banks decided to inject liquidity.
I do not contest this decision. I think it was the only way forward for several reasons. Without intervention, stock markets would have continued their uncontrolled decline; the S&P500 index fell vertically.
Liquidity injections were probably excessive and led to a surge in financial assets. It has given people the illusion that market shares will rise indefinitely, which will lead to enormous losses for the less experienced as soon as the Fed pulls out of the market.
Therefore, if the Fed’s decision was right because it was mandatory, the size of the action was indeed excessive. Focused on the fact that the government would solve the crisis in a short time with vaccines.
The most serious mistake in managing the crisis is precisely this, to calculate the time horizon.
Unfortunately, those in power today must prove that they can solve problems immediately. Everybody expects magic. Nobody in the world seems to want to be told that it is impossible anymore.
We went from Gordon Gekko’s “greed is good” to Tony Robbins’s “everything is possible,” and I don’t know which was more wrong.
It’s not entirely possible. You cannot consume the earth’s resources indefinitely, you cannot pollute indefinitely, and you cannot print money indefinitely.
If most people believe these tales, those who govern can only attempt to satisfy their electors. Some poorly applied solutions are worse than the problem itself, and unfortunately, it seems to be happening.
What if the Fed and governments miscalculated the duration of crisis?
Finally, in my opinion, the institutions have had an exaggerated reaction, injecting more liquidity than needed.
They thought they had to run the 100 meters as they were at the start of a marathon. They assumed the crisis would be resolved quickly, creating too much debt, which is now no longer sustainable.
Despite vaccines, the situation does not appear to return to normal. It is valid during a crisis. It is not easy to make predictions, and it depends heavily on the personal point of view.
During the 2007 crisis, I remember that there were catastrophists and optimists, but this time it’s different. The 2007 crisis was created by finance and solved by finance.
This time, we are dealing with a living organism, which can only solve the problem. Science struggles to understand many dynamics; the information is still completely incomplete.
Conspiracy theories constantly creep into the narrative, and he does not fully understand the gravity of the situation.
In the writing of this article, in July 2021, some countries with significant vaccination coverage began to resume lockdowns.
The Covid’s variants alarm, with each variant, the scientists and the media questioning the effectiveness of vaccines.
The longer this situation continues, the more people’s lifestyles will change, leading to massive crises that will require additional liquidity.
The crisis is not behind us, it may have just started, and we have already fired almost all the cartridges.
Covid-19 and the specter of inflation
At that point, central banks fed the money into the system, and they made the games. Let’s say we’re on a track without possible deviations. If the variants cause further problems that science cannot solve, the financial system needs more liquidity.
If they add more liquidity, the system and the company will hold on, but the inflation variable could spiral out of control. Many warn a storm is coming, a short and long-term cause of hyperinflation. Many recommend investing in real assets, including gold and real estate, to defend their money.
In a previous article, I consider inflation and buying a property to protect your savings.
Nobody can predict whether inflation will rise. Otherwise, the bond market would have already collapsed. Objectively, however, if the emergency lasts months or years, what could the Fed do differently?
And if the only way forward is current, how will it not lead to hyperinflation? And if they realized they had exaggerated in the first part of crisis management, what could they do now to recover?