Submitted by Joseph Carson, Former Chief Economist of Alliance Bernstein
The great divide between finance and the economy rolls on. In the past 6 weeks, jobless claims have increased by 30 million, while the S&P 500 index has increased by more than 30%.
The last decade saw the greatest divide ever between finance and the economy. At the end of 2019, household holdings of equities stood 2 times the level of disposable income, an all-time high.
That divergence between finance (stock market) and the economy was fueled by easy money. To be sure, policymakers kept official rates near zero for roughly half of the 130-month economic expansion. Also, except for a brief 6-month period in early 2019, policymakers kept official rates below the core rate of inflation. Never before in any business cycle has official rates remained below the inflation rate for almost an entire growth cycle.
In 2020, the policy of easy money policy has gone to new heights. On March 23, the Federal Reserve announced plans to make unlimited purchases of financial assets to support the financial markets while also indicating they planned to utilize emergency lending powers.
Artificially evaluating finance over the economy does not guarantee a recovery, while it can also lead to financial instability at some point as asset prices become unhinged to underlying corporate profitability.
Cheap money can create the illusion of recovery, but a policy that results in more debt and inflated asset prices is not a bridge to recovery; it's another bubble.