Shaking the magic money tree
What happens when the fruit stops dropping?
- Dateline
- 27 June 2024
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?
Links to related stories
- Be Careful What You Wish For – National Review, 23 June 2020
- Paying for coronavirus will have to be like war debt – spread over generations – The Conversation, 11 June 2020
- Do negative interest rates work? Economists can’t agree on how effective the policy is – CNBC, 11 June 2020
- MINDBULLET: Sweden applies for IMF bailout (Dateline: 24 November 2029)
- MINDBULLET: Where has all the money gone? (Dateline: 30 November 2030)
- MINDBULLET: UN DECLARES POVERTY ILLEGAL(Dateline: 12 January 2021)
Warning: Hazardous thinking at work
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