A stimulus will help somewhat in the short term, but the Fed needs to keep working capital going to pay wages and keep supply lines and production lines fluid, Real Vision’s Roger Hirst said in today’s Daily Briefing.
The problem is that their short-term fix could be detrimental in the long term to a system that is fundamentally flawed, triggering a squeeze on pension funds, a massive supply crunch, and debilitating inflation as the stimulus leads to more dollars chasing fewer goods.
Hirst said the difference between previous financial crises and today is twofold. For one, devastation is happening in the real economy at breakneck speed. And market structures have changed significantly since 2008 – especially with the rise of passive investing, where investors don’t have cash buffers, which accelerates selloffs on the way down.
“The breakages that we’ve seen and the players that are now going to be absent for an extended period have fundamentally changed the fabric from the last 10 years,” he said. In other words, the rule book from previous selloffs no longer applies.
Hirst argues that all of this is indicative of larger flaws in the fabric of our financial system and said there is no quick fix for the Fed. While things may rebound to a certain extent after the virus, he says the system and the economy are broken and that will play out in unprecedented ways during the coming months.
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