Opinion | Covid-19 market bubbles, a creation of the distorted global economy, cannot last

A global pandemic and the devastation it has wrought on the real economy hasn’t stopped stock and property markets reaching new heights

Despite the Fed’s best efforts, such asset bubbles cannot be sustained. Could political instability in the US be the shock that deflates the bubbles?

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The New York Stock Exchange is reflected in a puddle on January 4. 2020 was a historic year marking a rapid plunge into bear market territory and a swift recovery into the bull zone. Photo: Bloomberg

Published: 1:15am, 21 Jan 2021Updated: 4:34am, 21 Jan 2021

The year began with lockdowns and varying degrees of restrictions on movements across the world as the Covid-19 pandemic accelerated with new, fast-spreading variants being discovered. Financial markets, however, began with new records.

The pandemic is projected to have caused the global economy to decline by about 5 per cent in 2020. Meanwhile, government deficits are projected to increase above trend, by about the same amount. Despite the combined loss of one-tenth of the global economy, global financial markets ended the year higher than before the pandemic. Could this Covid-19 bubble pop in 2021?

Quantitative easing after the 2008 financial crisis led to an asset bubble across the world. Governments and central banks used more debt to climb out of a debt crisis. When this bubble was teetering on the edge in September 2019, the Fed brought out a second round of quantitative easing to resuscitate it.

It finally collapsed when the global economy seized up under the pandemic in the spring of 2020. What happened after was like magic.

The Fed quickly introduced a third round of quantitative easing, totalling US$2.3 trillion. The US government also committed to about the same amount of cash handouts for households and businesses. Essentially, the Fed monetised the extra government expenditure, making the government spending true helicopter money.

Liquidity, zero interest rates and fiscal stimulus doesn’t always lead to rising asset prices. Japan’s experience shows that. There must also be eager speculators with some capital to make it work. It would seem American millennials who received the helicopter money decided to take a punt by buying call options on tech stocks.

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