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There Ain’t No Such Thing as a Free Lunch – Part 3

There Ain’t No Such Thing as a Free Lunch – Part 3

In previous articles, I examined the negative externalities of post-Keynesian measures like unlimited monetary easing. First, I explained that such policies were inflating asset prices, squeezing working and middle classes, and thus leading to a core deflationary impact on the rest of the economy (see There Ain’t No Such Thing as a Free Lunch – Part 1). Then, I wrote that too many bailouts might lead to moral hazard and zombie companies, undermining future economic growth (see There Ain’t No Such Thing as a Free Lunch – Part 2).

If such policies tend to weaken the economy, then why assets like stocks, bonds, and real estate keep on rising?

Greed is Good

As already mentioned, bonds and equity markets have been more and more driven by the “Fed put” narrative (see The Fed Put Narrative Era). Besides, households might see the drop of interest rates as a screaming buy signal in the residential real estate space. People have been taught that any correction should be regarded as a huge investment opportunity, so everyone is willing to join the party.

Fear of missing out is a powerful catalyst, especially when wages inflation is so low that all you can do is hope for significant returns on investment markets. If the Fed has our back and if Nancy Pelosi is right about “the stock market floor”, then why not taking risks?

Narratives and Fantasy

Even if people love to state that “the market is not the economy”, assets like, stocks, bonds, and property, are supposed to reflect economic values somehow. And the bad news is that GDP growth has been decreasing for decades in Western economies (see chart below).

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Olduvai IV: Courage
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