I write about the whiplash effect in my book on personal finance, so it's not like nobody could see this coming. But the CFO at Amazon was evidently unable to foresee what's now happening to the economy.
The whiplash effect comes about whenever central banks try to correct the economy. Instead of added stability, we get instability. It typically starts with a downturn in the economy. Central banks lower interest rates in response. They print money, which encourages consumption, speculative investments, and long term investment. However, nothing is fixed by the central bank's intervention. After an initial boost, we get price inflation and/or a collapse in investments and spending.
This is exactly what has happened over the last couple of years. Lockdowns led to a downturn which was met with various schemes to stimulate the economy. That sent all sorts of financial assets up in price. Consumption was boosted. Long term investments were made. But all of this has by now been reversed, and we are no better off than two years ago.
The fact that the brightest heads at Amazon didn't see this coming is astounding, given the long history we have of this kind of booms and busts. But ordinary people can be forgiven for their ignorance. The artificial stimuli was a trap that many have stepped into. Bitcoin went above $60,000, only to fall back below $20,000.
People have evidently also bought vacations in the belief that the future is bright. Down town Porto is as full of tourists now as it was at the height of optimism just before the virus scare. Many of these people will no doubt regret their lavish vacation once they realize the scale of the economic downturn ahead of us. We will see layoffs. Prices are going to continue up. Any savings in bonds, stocks or crypto will continue to go down.
 |
| Gaia and Porto |
By Dicklyon - Own work, CC BY-SA 4.0, Link
No comments:
Post a Comment