The rich got richer.

Investors got more than a backstop. They got a boost.

     "Twenty million Americans lost their jobs in the pandemic--working and middle-class Americans. At the same time, roughly 650 billionaires in America saw their net worth increase by more than $1 trillion."

                President Joe Biden, last night, to a joint session of Congress

Click: Visual Capitalist

America's top decision-makers learned from the Great Financial Crisis of 2007-2009. If there is economic distress, the Fed can pour enormous amounts of money into the system, and the ocean of liquidity stops the decline and fuels the recovery. Congressional decision-makers solidified what they already knew, which was that government spending with borrowed money is also an economic boost, and that a boosted economy helps the incumbent president. That is the one-two punch. This is why Democrats favored it in 2009 and Republicans opposed it. There wasn't consensus on what policy to implement, but there was consensus on what the policy did.

The lessons learned were applied during the COVID shutdown in March 2020. This time the Fed did what it does--free money--and Congressional Republicans were happy to spend money to help Trump. Democrats were happy to spend money to help poor people in distress. Net-net, empowered by Modern Monetary Theory which says that sovereign countries can borrow unlimited amounts in their own currency, a bipartisan consensus of Americans agreed to pull money from the open-ended, unknowable future to spend in 2020. The stock market rebounded. Trump was just barely abrasive enough to have lost re-election. Biden is continuing the one-two spend-free-money approach. It is popular. People like getting money they don't need to pay back.

Markets have been distorted.

The investing public is having a joy ride. It is the "Roaring Twenties" again, with cheap credit paying for a vast expansion of speculative investments in the stock market and real estate. The Fed's liquidity needs to go somewhere. They are using it to buy the Treasury bonds issued by the Federal government to finance the deficits. This means price signals of rising interest rates that might have been a warning of trouble aren't happening. If markets were functioning normally then the vast amount of new Treasury debt would need to go out into the markets to find private American and foreign buyers and bond buyers would, presumably, demand a higher rate of interest to sop up that new supply, a signal the government needs to go easy. Moreover, the purchase of those bonds would take money out of circulation, making it unavailable for spending somewhere else. That would have been another price signal--lower asset prices.

Since the major purchaser of federal debt is our own Fed it means we don't get a price signal of scarcity.  There is all we want available to borrow from the unknowable future. This means private money is searching for a place--any place--to be put to productive work. The result is the market we see now.  Interest rates are low, the stock market is high, and news stories are about people looking for NFTs, Non-Fungible Tokens. 

This era of free money--both monetary and fiscal--means that poor, working, and middle-income people have it better. Families will be able to pay for food and day care and health insurance. President Biden called attention to its effect on the wealthiest 5/10,000th of 1%, the richest 650 people. Less visible to the general public is the effect it has had on the wealthiest 10% of Americans, and especially the wealthiest 1%. This is the political "donor class." Very low interest rates made the COVID pandemic a windfall for them. One need not be a billionaire. It is good to be merely prosperous.

I will add the warning that regular readers of this blog will find familiar--and wrong, so far.  Distorted markets eventually "correct." Money isn't "free." It is a claim on the goods and services of an economy. People who loan money expect to be paid back. When people have money in their pocket they think it represents value. The "free" Fed money that finds its way into unproductive and overpriced investments eventually get the return one would expect from an unproductive, overpriced asset--little or nothing. 

Republicans lost all credibility during the Trump years on the issue of fiscal discipline, and they trained Republican voters not to demand it. They were big spenders for a Republican president. Meanwhile, Democrats are looking at the people who might be helped and the income inequality that has developed in the current economy and they consider this an opportunity to expand the New Deal. Taxing the wealthy would pull money back out of the economy and it is popular among the general public, which thinks the economy is rigged against them. Taxing the wealthy has a political problem: Those people are campaign donors. Republican officeholders will never support it. Democrats are wary of it, too. It will go nowhere.

So, we have a happy but dangerous equilibrium. Spend but don't tax.

 

Enjoy this era while it lasts.