(Written on April 10)
You may have heard that 16.8 million Americans have filed for unemployment over the past three weeks. What you may not have heard, however, is that the US stock market has been steadily rising. Yes, even though America’s main stock indices – the Dow Jones and the S&P 500 – had suffered their worst falls for three decades some two weeks before the first round of record-breaking unemployment figures were posted, they’ve begun recovering ever since.
And yesterday, as the total number of jobless Americans hit the dizzying heights of 16.8 million, the US stock market capped off its “best week since 1974.” The Dow Jones closed at just under 24,000, representing an increase of 27.5% compared to its three-year low of 18,591 on March 23. Likewise, the S&P 500 closed at 2,789, a 24.6% rise over the same period. In other words, just as unemployment data was indicating the evisceration of large parts of the American economy, the American stock market was making itself richer.
This counterintuitive disconnect between the Dow Jones’ performance and the number of unemployed Americans points is hugely problematic. Aside from raising basic questions about the moral fiber of US investors, it points to a more fundamental cleavage between America’s stock markets and its financial industry, on the one hand, and the ‘real’ American economy, on the other. And more deeply, it raises serious questions as to whether the unprecedented, trillion-dollar stimulus program undertaken by Washington in the face of the coronavirus pandemic will benefit the US economy – and population – as a whole.
But what has caused this cleavage? The answer is simple: government fiscal policy. Since the financial crisis of 2007-8, the US government has prioritized quantitative easing for financial institutions over basic financial support for individuals, families, communities, and small businesses. Between 2008 and 2015, the Federal Reserve’s balance sheet of assets ballooned from $900 billion to $4.5 trillion, as it pursued a policy of buying Treasuries and mortgage-backed securities from banks, hedge funds, and other financial institutions. The Fed has continued on this course since 2015, with its balance sheet still standing at a hefty $3.9 trillion in March 2019.
The effects of such a monetary policy aren’t hard to find. Back in 2012, the Bank of England reported that the QE program it began in 2009 had caused the value of shares and bonds to rise by 26%. It also noted that 40% of these gains went to the wealthiest 5% of households in the UK. Comparable studies conducted within academia have come to similar conclusions, for Asian markets, for Japan, and for the US and the UK. Simply put, the more money a central bank gives to financial institutions, the more money these institutions pump into the stock market. This is particularly the case whenever quantitative easing is executed during a period of low interest rates, which is to say, it’s almost always the case.
And because the Federal Reserve’s benchmark interest rate has been close to zero since late 2008, the banks, funds and institutions fortunate enough to receive QE cash haven’t been particularly interested in actually lending to business and stimulating the core American economy, as concluded by a 2019 paper published in the Journal of Financial Economics. Instead, they’ve been chasing high returns in the stock market, where ‘moonshot’ tech firms increasingly predominate. As a result, a gradually shrinking share of America’s wealth and capital has been directed to American businesses and residents.
This deepening, quantitative easing-led divergence between the US stock market and ‘average’ American companies and people has arguably reached its zenith in the wake of coronavirus outbreak. On March 23, when the Dow Jones briefly erased all the gains it had posted since Donald Trump’s election, the Federal Reserve committed itself to “unlimited” quantitative easing. Since then, the Dow Jones, S&P 500 and other US stock markets have all been climbing steadily. In parallel, the Federal Reserve’s balance sheet has swelled to a record-breaking $6.13 trillion, given that it has spent $1.7 trillion buying bonds and other assets from financial institutions.
This is why the US stock market has had its best week since 1974 and why it has been growing during three weeks of escalating unemployment figures. Its performance is no longer a metric of the health of the underlying US economy, but rather of how much money hedge funds are being given by the Federal reserve to buy shares in (mostly) speculative tech companies.
Clearly, such a policy isn’t sustainable. For one, the United States’ national debt currently stands at $23.5 trillion, having doubled in the ten years since 2009 (i.e. since quantitative easing). And the expectation is that $5 trillion will be added to the balance sheet over the course of the coronavirus pandemic, potentially undermining future economic growth, insofar as it ends up reducing commercial investment.
But more importantly, directing trillions of dollars towards the stock market while American businesses, communities and people flounder is creating dangerous imbalances in the US economy and wider society. In the short term, it will undermine the chances of a genuine and lasting economic recovery, since quantitative easing neglects small and independent businesses, which generate almost half of all US economic activity and create two-thirds of net new jobs. And in the longer term, it will only exacerbate inequality between the richer and poorer strata of society, which has been growing in the United States since 2009.
Such inequality will increasingly hinder economic growth and productivity in the future. It’s therefore vital that, rather than throwing more money at the stock market, the US government and Federal Reserve consider fiscal policies that will directly benefit the American population and core American economy. Instead of committing to theoretically “unlimited” quantitative easing, Washington could seriously examine the feasibility of a universal basic income, which would cost anything from $2.5 trillion to $3.8 trillion per year, depending on whose study you believe and assuming you paid out either $10,000 or $12,500 per year.
This might seem like a large bill, but given that a UBI of $12,000 per year would grow the US economy by around $2.5 trillion, it would be worth it, particularly when you remember that the Fed has expanded its balance sheet by $1.7 trillion since the coronavirus outbreak began. And at the moment, all it has to show for its QE bias is 16.8 million unemployed people, and a stock market that’s divorced from reality.
And even if the US government weren’t keen on a fully fledged UBI, it could still expand its one-off $1,200 payments to individuals and its stimulus package for small businesses, which may not be enough to keep many businesses afloat. This would be vastly preferable and vastly for more beneficial for the US economy and population than an enlarged quantitative easing program.
Ultimately, such a program is only going to help the stock market lull the rest of America into a false sense of security. Worse still, if previous QE rounds are anything to go by, it’s also not going to rectify the structural problems that have clearly left the United States so vulnerable to the ongoing coronavirus outbreak. So rather than celebrate the stock market having its best week in decades, we should be seeking ways to bring it back in alignment with the rest of the economy.