Financial media pundits have been debating the question of how long it will take our economy to get back to normal. Usually it’s tacitly assumed that “normal” is something resembling the state of affairs before the breakout of the coronavirus pandemic. Few if any bother to consider whether that state was truly normal or healthy or whether it is even what we should aspire to. As if often the case, the most important questions are the ones not asked.
Before the virus SARS-CoV-2 and the disease COVID-19, the US stock market was in a bubble. After several years of near-zero interest rates, corporate America had run its debt to the highest level in history:
Tempted by years of Fed-imposed ultralow rate policy, corporate insiders had borrowed these trillions and used a good portion of it to buy back their own stock. They structure their compensation packages to rely on stock options grants, which leverage compensation to increases in stock prices. Meanwhile the average American had seen little benefit from this monetary largesse. More were working, but fewer at breadwinner pay. Amidst the bull market in new multibillionaires, many were barely scraping by:
The economy was already on the verge of recession; one of the most reliable forecasters of recession, an inversion in the yield curve, had occurred last year, as highlighted in these pages. Last September, the repo market had come unglued, prompting the Fed to pump billions into the market on a daily basis, and resuming its Treasury buying and balance sheet growth while denying it was engaging in quantitative easing.
Is this the normal we really want to return to?
Or a pathological state Wall Street wants to return to?
In any case, it’s unlikely the economy will return to a state like the one at the dawn of 2020, because it was unsustainable to begin with. Even once the coronavirus is out of the way, we still have to deal with the consequences of years of artificially low interest rates and a collapsing financial bubble.
Moreover, it’s unlikely the that the kind of improvement in living standards the US enjoyed during the twentieth century will ever be revisited unless the economic policy responses to the pandemic are soon reversed. Price signals form the neural network of the financial system, and for it to allocate capital efficiently they must operate unhindered. Among other things, that means bond prices must reflect their inherent inflation and credit risks, not what central planners think they should be. The same goes for other prices of other capital instruments like stocks, commodity prices, and labor. The relative freedom of these prices to respond to the wants and needs of consumers and the cost of resources is what led the US to some of the highest living standards in history during the twentieth century, and are an essential ingredient in restoring this progress.