Originally published in Medium by the author
Itâ€™s more than a year since I wrote about a potential market crash. Needless to say, it was an eventful year, and we are seeing a lot of articles looking back. There are many interesting events to look back and introspect on, but for the moment, letâ€™s game what lay ahead of us for this article.
Over the last few weeks, there has been a steady drumbeat of signals in the bond market and conversations in the broader economy about more trouble on the horizon. This chatter is driven by the rollout of the American Rescue Plan and its impact on inflation. Covid lingering around, and its further mutations are also adding fear to the already panicking market sentiment. Old economic theories and partisan opinions are not helping either.
So should we worry and prepare for another crash or prepare for a boom.
Covidâ€™s impact on the economy is still being totaled, but estimates indicate global labor income went down by 3.5 trillion dollars. Most families had someone who lost a job during the recession and had to dip into savings or had to take extraordinary measures to survive.
In response to this monumental crash, the federal government has introduced 4.5 trillion dollars into the economy via three covid response plans, the latest being the American Rescue plan.
Hope lies in the nuances of these rescue plans. Since the panic of 1792, we had four mega bailouts.
- The Great Depression
- Savings and Loan Crisis
- Global Financial Crisis
- Covid Crisis
All of them saw the US Government stepping in and providing liquidity to prevent a total meltdown of the financial market or to recover from one. But the bailout during this crisis is truly different from its predecessors. For probably the first time, a significant portion of the bailout dollars was delivered directly to consumers.
Censusâ€™s â€˜Business formationâ€™ statistics is the best indicator to see this effect. GM, Burger King, Microsoft, CNN, Venmo, Uber, Airbnb all are examples of this effect.
Blackswan events such as this inevitably remove the weak ones and prepare the ground for the next batch of amazing companies. This is coupled with fundamental changes such as the gig economy and the normalization of remote working. The Covid crisis forced people to re-evaluate their preferences from where to raise their family to whom to work for.
I believe these factors together will usher in one of the greatest booms in the economy and improve overall prosperity.