So the big news overnight is that the fed is thinking of thinking of tapering. They have taken extraordinary measures in the wake of the unprecedented coronavirus crisis but as the recovery takes on a K shape, with some doing better than they were doing before and others worse, a one size fits all bazooka is probably the wrong policy.
Low interest rates and cheap money are floating to all corners of the market and driving valuations on everything from houses to startups to crypto to ridiculous prices. That money has to flow somewhere and often times it goes to the most useless things when there's nothing else left to buy.
Dot com bubble all over again
So an acquaintance of mine from school started a car dealership and he has a website. I'm not sure how much sales he does but it was recently valued at over a billion dollars. For what is effectively a car dealer and some fancy terms like blockchain and AI thrown in for good measure.
Another acquaintance started a blog peddling banking and insurance products. That recently got funding valuing the company at around $100 Million. Ridiculous price for what is just a glorified affiliate marketing site.
When money has no cost
Here's the main issue, there is no reason to be prudent. With money so cheap, it becomes a game of the greater fool. Why save and earn close to 0% interest when you can minimally earn 5% on some index funds and much more on DeFi, options and venture capital?
So if you have money or assets, now is a really good time because prices are going bonkers. Is this a good policy? I can't see how an untargeted approach benefiting many who aren't impacted by the pandemic at all is going to work out well. Bu hey, I'm not the one with the economics PhD.
Kicking the can down the road
So if it is obvious that there are going to be serious consequences as a result of this inflation, most of it not the good kind, then why isn't anyone doing anything about it?
The simple answer is that no one wants to be responsible for stopping the party. We all saw what happened in 2001 and 2008. No one wants a repeat on their watch so they will be content to kick the can down the road till it cannot be kicked anymore.
How long we can keep this is anyone's guess but I think it will be decades because technology and globalization is helping to curb inflation on the other end. Sadly, this impacts wage inflation as well.
What should be done?
I think that rather than hurting savers, rates should be raised and those affected by the pandemic should be given targeted relief. Some countries gave tech training to their unemployed workers who were forced to stay home at the height of the pandemic and I think that's a good approach although it might be a little too late for that.
Care also needs to be taken when it comes to prices of basic goods like housing, childcare, food etc. If this gets out of control, expect lots of people to be unhappy. This whole pandemic has been badly managed.