Thread by @srinicaps

Since the start of the worldwide #pandemic the U.S. government has poured trillions of dollars into the battered economy, hoping to avoid another #depression , While this has kept many businesses across the country alive, it has sparked on what the impact would be on the world’s

financial markets. For years, bankers and #hedgefund managers had been piling on more increasingly risky financial products that the markets were deeming as #safehavens
On a level of the entire U.S. equities market, the sustained lowering of the risk-free interest rate brings

about an inevitable rise in the price of asset classes, as we have seen over the past 12 years.
Having kept interest rates at historically low levels since the aftermath of the financial crisis, the Federal Reserve had very little room to move rates lower when the pandemic

started to batter the nationwide economy
The extreme rise in prices can only be attributed to an inflationary period of the world’s asset classes. But the problem in 2008 was disruptions to the flow of finance, which central banks’ liquidity injections could repair

The problem today, however, is a sudden stop in production, which monetary policy can do little to offset. Moreover, monetary policy can’t mend broken supply chains.

The common root cause of each recession is a contraction of economywide spending (or aggregate demand) relative

to the economy’s potential productive capacity. As consumers (households, businesses, or governments) cut back their spending, it doesn’t make sense for producers to keep generating as much economic output.

One obstacle to fiscal stimulus is that its effects leaks abroad, because some of the additional spending is on imports. As a result, each fiscal authority hesitates to move, and governments collectively provide less stimulus than is needed.

World leaders should recognize that these textbook responses will have only limited effects when the problem is not a shortage of liquidity, but rather supply-chain disruptions and a contagion of fear.

Credits
#WilliamDouthat
#barryeichengreen

@threadreaderapp
Unroll

#Pandemic sends real #yields on #corporatedebt into negative territory
Low interest rates and monetary stimulus drag down yields of high quality bonds

amp.ft.com/content/d3fc23…