A Gazillion Dollars and Hope It Is Enough

These days, I start the day with the overnight update of the major economic stimulus news from what seems to be everywhere.

To reflect upon the grave consequences of the current virus crisis’ impact on the global economy, the announcements of stimulus packages are becoming frequent in numbers and gigantic in size.

It seems that the over-feeding of the liquidity beast over the past 12 years has created a monster. To appease the angry markets and make a dent in the frail economy, nowadays unless the unit is in the trillions, they shouldn’t even bother making the announcement.

Breaking the Piggy Bank Again

This economic shock was sudden, real and widespread. The governments have to do something. Personally, I wonder if it will be effective in the medium-run.

The source of the money is once again, our children’s piggy bank. We are giving them IOU’s with no intention of paying it back. There is a fire in our living room and we need to put it out.

On a side note, I wonder if we spent 0.001% of what the central banks and governments are spending to fight the economic impact of the virus crisis on the virus prevention research effort, I wonder where we will be today.

But that is a topic for another “bear” to deal with. This Polar Bear will stick to economic and market commentaries. An Important fact is that we are once again spending money that we don’t have to help everyone.

To bolster the broken market confidence, the central banks are using words like “unlimited” now. In plain English, they are ready to be the buyer of infinite amount of government debt when issued to conduct deficit spending.

How did we get here and where are we?

What is More Effective?

In many countries, the political system forces the government to distribute money to take care of their respective political constituents. At the end of the day, to make everyone happy, just about every industry and everyone will end up receiving something.

This “something for everyone” (aka the Barnum and Bailey Effect) approach lacks strategic element. This approach is effective if it is the last bullet in the chamber.

If they have to do a round two, who do you leave out if the resource is not “infinite” anymore? Given that it is a demand shock that has jolted the global economy, I like putting disposable income into households’ pockets.

This means either a direct payment for people or subsidies for the industries that are part of non-discretionary consumption so that workers can stay employed.

So far, the general trend around the world is for the government to help everyone and everything. I wonder what they will do next when the $1000 runs out.

Linear Trend Continuation or A Large Structural Cycle

In sum, what the governments have done to respond to the economic shock is to do what they have been doing for the past 12 years. They are just buying time. They are not changing anything but they are keeping it going and hoping.

Industries that have run its life cycle, companies who would close if it wasn’t for subsidies and ridiculously low credit cost, and individuals maxed out on 5 credit cards all get to continue on.

The logic is that when that elusive recovery takes place, all debt will be paid and things will get back to normal. We are not looking far enough and wide enough.

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We desperately need a satellite picture of where we are on a structural long-term cycle perspective. Whether it is the environmental issues, education system, health care, globalization, poverty, or the monetary policies and responsibilities of the major central banks, we are tweaking the long-term important issues at the margin, hoping to right the imbalance that has been building for decades.

I know it is an emergency

I know there are needs for the government to act upon. I know people, companies, and countries need help now. What if this is not a hiccup on a linear continuation of a trend? What if the imbalances got so distorted where resources spent to maintain status quo will be a colossal waste?

The Polar Bear is asking.

Hainan Free Trade Port Lecture a Resounding Success
David Chon is a Korean-American from New York working in Hainan. He has over 30 years of global finance and investment experience. He is currently investing in businesses in China.

Related article: Feeding the Global Imbalance, analysing the causes

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