Unintended Consequences

Now that we’re into March, most of the world is coming up on the one-year anniversary of the start of a pandemic that almost none of us were prepared for.   Before it happened, the world was ‘normal’ – and very little of what has happened since would be described in similar terms.  Now might be a good time to look back and reflect on what has happened from the perspective of ‘knowing what we know now, what might we have done differently?’

Let’s begin with the public policy response from central bankers and national governments.  Unlike the Great Depression of the 1930s, the response we experienced this time proved to be part of the solution, not the problem.  The central banks brought interest rates down to the lowest point they could reasonably go to – and promised to keep them there for a sustained period.  That stance provided a framework and context for governments and citizens to proceed with confidence.  Governments did their part, too.  Whether from the progressive or conservative ‘side of the aisle’, federal governments throughout the western world quickly began sending cheques to affected (and even many unaffected) citizens to keep the wheels of the economy turning.  As a result of the combined monetary and fiscal stimulus, two crises were averted: one in public health; the other in economic output.  It’s all good.

Here’s where we run into a problem.  Economists and consultants are fond of the term ‘unintended consequences.’  That’s where the solution to one problem ends up being the root of another.  As we sit here in March, 2021, looking back on the experience we’ve all just lived through, I cannot help but think that we are now experiencing asset bubbles in both capital (read: stock) markets and in real estate markets.  Copious amounts of all-but free money with all-but zero interest rates might mean:

  • bonds will be paying essentially nothing for a generation; but
  • real estate is cheaper than ever from a cost of carry (mortgage) perspective; and
  • stocks are riding a jetpack of explosive growth

We should all be thankful for the successful and purposeful policy response we got from our leaders this time around.  That said, I also believe we should all be extremely cautious about the good times coming to an end – and likely soon – because the stimulus we’ve all enjoyed is unsustainable.  In short, I can plainly see and even appreciate the ‘unintended’ part.  My question to you: can you anticipate the ‘consequences’?

John DeGoey

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