Derivatives Economics

The “Miracle Recovery” Narrative: We Are Just Printing Our Path To Prosperity

For the past few weeks we’ve been bombarded by news and expert analysis to celebrate an incredible rebound in the global economy. They are no longer even presented as projections or expectations, but as fact, as if the return to dynamic growth was already underway. Stock markets certainly seem to be in agreement, going from record high to record high, as all political and institutional leaders congratulate each other on a job well done.

While this is largely the consensus in most western economies, this cheering, victorious mood feels most bizarre in Europe. Celebrating a recovery during a third round of total lockdowns, closed shops, travel bans, and millions of unemployed seems like cognitive dissonance at best, or political hypocrisy at worst. France, Italy, Germany, Austria, all have started another round of shop closings and severely restricted social activities and freedom of movement. And they did what they called the terrible, deadly third wave of infection and overcrowding of the hospital. To convince the public of the urgent need to recede, they painted post-apocalyptic visions of a virus-overrun nation and alerted the impending collapse of their public health systems. In these extreme conditions, these existential threats very much like a state of emergency, it is really quite difficult to see how the economy could thrive.

One could argue that the trillions dropped on member states by the ECB and the helicopter have actually achieved their goal and successfully saved and restarted the economy. However, it is still difficult to see how injecting cash into a forcibly frozen economy can get economic activity back on track and boost productivity, as it is still largely illegal to be economically active and productive. In other words, you can pump as much fuel into your car as you want, but if the engine is dead, you probably won’t go very far.

Another common argument we hear a lot these days to explain the roaring stock markets is all hopes based on the vaccine. The idea is that since markets are forward-looking, they are pricing in the great news of a successful vaccination rollout that will allow Europe to achieve coveted herd immunity and eventually reopen the economy. Here, too, we face a reality check problem: the EU completely botched the rollout and achieved the worst and slowest results among Western economies. Logistical chaos, inadequate doses, infighting, indecisive leadership, and scientific guidance that often flips important issues like vaccine safety have severely damaged the bloc’s credibility, but also severely tarnished its economic prospects. This eagerly awaited “reopening” and return to normal is a hope that seems increasingly distant and elusive.

How does all of this fit together with the unprecedented monetary and fiscal economic wave? Where do all those trillions of euros go when so much of normal economic activity is suspended for a year? The most obvious answer, of course, is inflation. This has been evident in asset prices for years, but now there is a very real risk that inflationary pressures will affect ordinary consumers as well. The record-breaking spending spree, coupled with extremely supportive and accommodating monetary policy, has already resulted in piles of cash, not only in the banking and corporate world as we saw in 2008, but also in the average household.

At the micro level, looking at these budgets and their finances, it is clear that right now many citizens are simply frozen by fear and insecurity. They have largely taken a conservative approach and decided to save more as they are rightly wary of what lies ahead and when their next paycheck might come, if at all. Indeed, this perfectly reasonable response has been identified as a problem by mainstream analysts and institutional figures. In Germany, for example, the cash holdings on private bank accounts rose by 182 billion euros to 1.73 trillion euros, according to the country’s central bank. The Ifo Institute published a report on this “excess savings”, arguing that it undermines hopes for a consumer boom. Simply put, in this brave new world, it is bad for business to be accountable and to plan ahead for your future.

At this point in time, the economic crisis is still raging and trade restrictions are so severe and numerous that even then most consumers would not be able to spend more. Sooner or later, however, economic activity will return in some form. Even with severe restrictions or new rules and regulations, shops will reopen, and even if this is done under the terms of a “new normal”, citizens will eventually get used to it, or at least go along with it. It’s still difficult to say when the average consumer will feel safe enough in their own financial and professional prospects to spend all of this money saved, but once they do, the risks of inflation will increase significantly.

Meanwhile, gold prices seem to have weakened in recent months, leading many analysts and commentators to declare that the precious metal is no longer a safe haven or relevant at all in a modern portfolio. This view is so blatantly and dangerously wrong that it is frankly surprising that it gets traction at all. Of course, gold demand will be suppressed if borrowing costs nothing. Spending, buying, and gambling are actively encouraged; and all the political and central bank figureheads relentlessly reassure anyone who will listen that the support will not end anytime soon.

This is the classic structure of an inflationary environment, the same prelude that we have seen over and over again in monetary history.

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