It’s only natural to spend your way out of a crisis. When you’re feeling blue, there’s nothing like a little retail therapy to lift your mood. When the going gets tough, the tough go shopping. Faced with a big problem? Throw some money at it!
But when governments do it, the rest of us better beware. Officials call it stimulus, quantitative easing, or relief funding. Detractors call it magic money or mythical beans. It’s easy enough for governments to release funds to businesses and individuals. They can always borrow more by issuing bonds or raising foreign loans.
Central banks play a part in this too; providing liquidity where needed and lowering rates. And when interest rates hit zero or less, it makes sense to buy assets that might show a return, rather than hold cash.
The spending spree has been going on for years. Not even the COVID crash of 2020 could stop it. In fact, as governments rushed to support their economies in the face of the crisis, things got really out of sync. Stock markets rose, even as jobs fell and profits plummeted.
But at some point in time, debts have to be repaid, relief cheques curtailed and spending reigned in. Interest rates have to rise, and cash has to get some dignity back; otherwise, it’s worthless, and we all know where that will end. Now financial markets and the real economy are operating in parallel, but unequal, universes. They don’t bear any resemblance to each other, and governments will be tempted to shake the magic money tree again, to prevent another meltdown. But this time, will the ‘fruit’ fall?