A world without DEF (2/2) – EconomyMorning

The consequences of pandemics are not the same as the consequences of wars – and this is a phenomenon that should greatly worry our political and monetary authorities …

We parted ways yesterday on one question: Will the Fed manage to keep the markets rising forever – by always pumping more easy money into the system?

This research article published by the San Francisco Federal Reserve disagrees.

Here is an excerpt from “Longer-term Economic Consequences of Pandemics” (Federal Reserve in San Francisco):

“If measured in terms of deviations from benchmark economic statistics – the natural real interest rate – these reactions indicate that pandemics are followed by lasting periods (several decades) of declining investment opportunities. , perhaps due to excess capital per surviving labor unit and / or a greater desire to save, perhaps in order to increase precautionary savings or rebuild declining wealth.

In either case, if this trend is followed after Covid-19, then the trajectory of the global economy will be very different from what we might have expected just a few months ago.

Let me translate …


Wars cause a 20-year boom thanks to reconstruction. Pandemics, on the other hand, cause 20 years of deflation. Oops! Not only do wars destroy physical assets that must then be rebuilt, they also tend to kill a substantial percentage of the workforce, causing a shortage that drives up wages.

Capital therefore wins by financing reconstruction, and labor wins because workers are scarce and in demand: it’s a win-win!

Pandemics are much less sympathetic, particularly Covid-19. They are like neutron bombs: they leave the environment intact, so there is no trigger for investment.

Unlike the Black Death, which decimated the workforce from China to Europe in 1350, the Covid disproportionately attacks the elderly, many of whom have already left the workforce. The reduction in the workforce linked to Covid -19 is therefore on a scale too modest to create a shortage of workers sufficient to increase wages.

In other words, it’s a lose-lose: capital does not get good returns on investment in a low demand environment, and workers’ wages stagnate in a low demand economy.

Fantasies and illusions

There followed 20 years of asset deflation… but but but… wait… the Fed is all-powerful, and its powers, divine! The Federal Reserve can raise prices, direction the Moon, forget the lessons of history, the fundamentals, reality!

Yes, well … fantasies are nice, illusions are fun, but reality always breaks in, and the diminishing returns of the neo-feudal feast organized by the Fed for the super-rich don’t go delay seizing the markets by the collar, no matter what the US central bank bleats.

A couple of funny little things like mean reversion, bubble symmetry, and nonlinear dynamics are, in fact, not under the control of the Fed (argh!), Because human policies are incapable of totally control them. Statistical aberrations and extremes have a strong tendency to reverse, regardless of the manipulations attempted by humans.

These fluctuations are therefore not the ones that allow you to buy when stocks are at their lowest, no: they are reversals capable of completely reversing the ascent of assets towards the stars via the symmetry of the bubbles.

Markets that have climbed 1,000 to 30,000 points, for example, retrace their steps to fall back to 1,000, no matter if humans beg, shout, plead and moan: “It can’t be! “

Well yes. Pride is a heavy burden on our faith in “good” human policies and their ability to maintain their magical action forever and ever. As long as the Fed pursues the “right policies” and keeps printing trillions out of thin air and buying bonds (and all the other things it has to buy to drive prices higher and higher ), the Dow at 100,000 is just a matter of time.

Or not.

The idea that humans are not in control is anathema to the technocratic elite: so when the inevitable reversal causes an asset crash, everyone will rush to determine the human cause of the disaster, as well as its solution. human, so we can get back on our way to the 100,000 Dow.

The pendulum has gone too far

These causes will be sought in vain, however, because the extremes reached by the balance wheel reach their limits: it will therefore start a race in the other direction, and reach the opposite extreme, minus a little bit of friction, minimal friction. moreover in a financial industry that prints trillions of dollars at the click of a button.

Want an example that says the pendulum has gone as far as it can go? Think about it: billionaires have earned $ 1,000 billion since the start of the pandemic.

Can 20 years of asset deflation be squeezed into just two years? Absolutely. The global financial system has pursued 20 years of experience, and reached extremes which should soon produce interesting results.

The extremes get more extreme until they are reversed, a reversal that no one believes in, as 2020 is in its final stages. If there was a scale of pride, we would be close to infinity. Reversing this almost infinite extreme will be a spectacle we will remember forever.

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