My understanding is that the role the FED played was to maintain liquidity in the bond markets, and the costs of borrowing low for both businesses and the government. This probably prevented bankruptcies at a time when businesses faced mandatory closures by the government, although they arguably (and I do argue that) kept doing it way too long (they were still buying bonds as of February of this year…).
The government put money in everybody’s pokets through loans to businesses and stimulus checks. This is, to me, the main difference with the printing that went on from 2008 to 2019 (and didn’t give raise to inflation): this time, money was put in laymen’s pockets and actually spent on goods, while it was mainly put in the hands of people who didn’t need it before (yay, banks as a way to efficiently allocate resources and trickle down economics! xD) and so went mainly into inflating the prices of assets (stocks and real estate).
Arguably, the second part (giving people money) played a far greater role into getting inflation on than the first one (low interest rates and liquidity in the bond markets), and the effect has been compounded by people having time and playing lottery on stocks and cryptos, whose price skyrocketed (so people felt wealthier than they actually were).
The situation was very complex and finding the right way to react was very difficult. I agree the FED has been very slow to react but they are now doing what is needed, and that is reflected by a strenghtening USD, showing that on an international comparison, people trust the USD stability better over most other currencies (it’s always a matter of relative comparison: the US are doing bad but other countries are doing way, way worse). I’d say they’re doing good given the circumstances (though I agree with @Jagermeister that I am really happy to live in Switzerland and I am also very, very glad that we are getting to a point where money starts having some value again because despite increasing the size of available wealth/GDP, zero/negative interest rates skew the game heavily in favor of the people who already have wealth while making it more difficult for people who don’t to build it).
The demand side was not crushing. People got even checks from government to increase the demand. Printing money fueled the demand even more. Everything happened while restricted supply by broken supply chains. Result was obvious to predict - if you have more and more money in the economy chasing fewer and fewer goods. It’s econ 101 recipe for inflation.
I think the main difference was that in 2008 people got scared and nobody wanted to spend money - it was a demand crisis and for such recessions expansionary policies can help. In 2020-2022 people had no issue with spending money - it was a supply crisis. In such scenario expansionary policies overheat the economy.
Could it be that another difference was that in 2008 whomever individual or company that went bankrupt the government let them down (except the big banks). Lost your job? good bye. Lost your house? good bye. Your 50 employee company bankrupted? Bad luck, it is the capitalism.
Whereas with the 2020-2022 almost everyone has been subsidized to compensate for the virus lockdowns.
This might be more about lack of tools/effective social safety net in the US. I don’t think the primary purpose of the economic impact payments (aka stimulus checks) were to increase demand, but instead to relieve hardship due to unemployment/reduced hours. (But it does have quite a demand impact since it’s indiscriminate).
Unlike Europe, I guess the US couldn’t (= not able to technically, or politically) just pay for reduced work-time, which seems to me the most efficient way to keep workers employed during a short-lived stress with lots of unknown. (With low interest + loan to keep business afloat)
And then they misjudge the size of the recovery plan most likely esp. given the war that started afterwards and impact on energy/food price, but it’s easy to say in hindsight.
But that still wouldn’t mean that doing nothing would have been better, the counterfactual of doing nothing is a broken economy with mass unemployment that seems pretty undesirable for keeping a country stable.
Well, if you have ultra-inflationary policy don’t be surprised that you produced inflation. God thank that Biden’s Build Back Better was stopped by some rational Democrat. We would have an Inflation tsunami with this crap.
That’s another nonsense. Even left-wing economist like Lawrence Summers were telling everyone that we will end up with high inflation. Not speaking of more conservative economists.
Another nonsensical argument. It’s like saying: we screwed up the economy - but if we didn’t do it, it would be even worse, likely another Great Depression. How about alternative of applying correct macroeconomic tools and policies to correct situations - something that rational economists were promoting since forever.
How about focusing on the actual problem - fixing supply chains, ban lockdowns, rolling back terrible Biden’s energy policies to increase energy production, and in general improve economic growth - increase the production of goods and services, moderate the demand side and keep monetary expansion reasonable.
It may not apply to the US but Switzerland wouldn’t have much inflation if it wasn’t for raw materials, food and fuel. The war made fertilizers and fuel less available, it has an inflationary impact on the global market.
I get your point, though, inflation was out of hand in the US before the war and monetary and fiscal policy had to do with it, though supply chain constraints did too. It isn’t an easy field to navigate, the FED is staying adaptative and is now ramping up its answer, we’ll have to see where all of this leads.
Speaking of when do we reach the bottom of the dip. Has anybody here some insight on where we are standing on a bankruptcies point of view? 2001 had 9/11, 2008 had Lehman Brothers, I’m not sure we’re not close to the bottom (or haven’t reached it already) if we are not facing some other major event to precipite another leg down.
So, using dividend adjusted VT in CHF, at the end of July we are 6 weeks after and 9.1% higher than the minimum from June 17th.
Will we see another +10% rally next weeks? Or another crash to -30% from ATH? I don’t know. I have an opinion that if the situation doesn’t change to worse dramatically, we should go up until the end of the year. But I am not acting according to my opinion. I still have around 20 years to go, I have a strategy, I have a target assets allocation and I am going to follow them no matter what.
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sure, the war. They think we are idiots.