Of New Normals and Economic Downturns

Global stock markets are up 40% from the lows in mid March (the height of the Covid 19 pandemic panic). Does this mean that the stock markets are predicting blue skies in the near future? Maybe these stock markets are projecting 6 to 9 months ahead? Is it now safe to assume everything will go back to normal in 6 to 9 months?

There is an obvious and extreme disconnect between current stock markets and the global economy. This phenomenon does not match the economic reality where production of goods and services are significantly down, and unemployment is up.

The explanation for this disconnect may be as follows.

Since March, all governments of the world have approved economic stimulus packages and most developed country central banks have been busy printing trillions of money. These floods of money are primarily meant to help support wages and keep businesses afloat. However, having a sudden torrent of newly printed money poses a “distribution” problem.

While the money waits to make its way to the pockets of the poor and companies who need it most, money via the efficient banking system tends to find its way into the pockets of the super rich who are more “bankable”. We saw this phenomenon in 2008, where the great financial crash that initially promised market reforms ended up making the filthy rich even richer.

In addition, because of the lockdowns, the rich has also been spending less and hoarding money. Since they can’t buy fancier cars, yachts, jets and homes, they presumably have bought more stocks.

You can ask any worker, how is his or her financial situation since covid 19. Most if not all, will give you a negative answer. Yet, the stock markets continue to rise. The global economic and banking system is amoral and dysfunctional. Economic thinkers need to find a better way forward.See: https://www.cnbc.com/2020/06/02/why-stocks-could-keep-going-higher-even-with-massive-unrest-across-america.html