There was no way to know that ex ante. I think the other thing is that, when we talk about how it might infect the financial system, because if you inflicted enough loss just by things not operating long enough, you can have another financial crisis, right? Multiples greater. And banks are better capitalized and take less risk.
When the stimulus runs out you can start having people not paying their rent, not paying their mortgage, not paying their credit card bills, and that could cause some problems for the financial sector.
You see big differences in emerging markets. But at the bottom of the income distribution, there are people who are forced to bear these terrible risks to do their job, or they lose their job, or their small business goes away. So they were kind of less affected.
You have people talking about the Robinhood traders, right? People literally taking their stimulus checks and opening a Robinhood account, and then buying stocks that have an interesting story. You look at how the US market is back where it was before the pandemic, back to its peak. If I look at the emerging markets index—all these are down for the year. But the US is up! Which is another aspect of inequality in the sense that the recovery even of financial instruments has been very unequal with the leaders getting further ahead relative to the laggards.
Like, one kind of plausible effect would be a kind of decrease of international movement of people and movement of goods—. HFM: Yeah, deglobalization. But it was happening before the pandemic, right? The Trump-driven disengagement from China, shortening of supply chains, retreat from multilateral trade agreements, pulling out of TPP—that was starting already, and in a way this sort of accelerates it. I think another interesting aspect of that is that we have a really long—decades almost, maybe going backwards to W.
And the thought was, if you look at that locally in time, this is just a win, right? It was just that instead of paying your insurance bill, you were consuming your insurance.
And in a sense, globalization thrives on that. HFM: Yeah, when people are sick. Having redundancy in the system is important for resiliency and dealing with unanticipated shocks. You can sometimes extrapolate from your own behavior. Like, do you have more toilet paper in your house today than you did six months ago? Like maybe an extra shelf that previously I had cool knickknacks or whatever on instead of toilet paper. Do you think there should be more of it? And we need to share that cost across everybody and the way we do that is luckily in the United States we have the capacity to borrow, or the monetary authority to support that spending.
One of them was a sommelier at a fancy restaurant, who was on unemployment, and the other was working on setting up a new service for first-class passengers at one of the airlines. And they had received a fair amount of government money, right?
But this is a critical situation, right? People are not going to be able to pay their rent. And you wind up with like, chains of nonpayment. And, you know, there was a lot of debate about this with the six-hundred-dollar supplement to unemployment, that for some people, it meant they made more money not working than working. And people were like, this is terrible, these people are going to refuse to go back to work.
The economy just stopped. But for the US and for like, core Europe, there is just no question. At least at the beginning, you should be fairly open-handed. HFM: Look, when the shit hit the fan, people still fled to the dollar, even in this situation.
Countries that you thought would never be able to get away with it. Poland has done massive expansion—the national bank of Poland buying quasi-sovereign debt. Colombia—they were buying TES bonds. So small emerging market countries with small floating currencies have been able to do quantitative easing.
The countries with the lowest credibility, the countries that nobody but nobody believes that they will ever reverse fiscal profligacy, nobody wants to hold their currency. Not that I have any special reason to dislike Argentina. At what point do these kind of longer term trends begin to need to be addressed by investors?
HFM: Investors respond to incentives, right? It should be based on somebody doing the analysis and putting a tax on things that have uninternalized externalities. HFM: Well maybe not even carbon, maybe you look at different fuels. Maybe coal is taxed this way and oil is taxed that way, and gas is taxed some other way, but the internalization of those externalities.
That, to me, is the most efficient way to do it. And then you lower the payroll tax. Not because I saw an Al Gore documentary and I feel so bad, but because it makes sense and I am doing the right thing by my investors, and other forms of energy production are going to make economic sense.
I am going to invest in them, and the technology will advance. You look at some of these ESG funds and they own tons of energy companies, and you wonder what the heck these standards even are.
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