Taps Coogan – 21st of August 2020

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Mohamed El-Erian, Allianz chief economic advisor, recently spoke with CNBC about his grave concerns that efforts to stimulate the US economy have been overly focused on financial markets and large investment grade companies and not small and medium sized business that not only employ most Americans but are the primary mechanism for inclusion in America’s free-market system.

 

Some excerpts from Mohamed El-Erian:

“The strong have been getting stronger and bigger. The weak, weaker and almost disappearing. And if you ask why… one is what’s happening in the economy: who’s allowed to reopen, who’s not allowed to reopen. But also…, if you are an investment grade issuer, you’ve been able to issue $1.4 trillion (of bonds), a record. The last time we saw that amount was for the whole year of 2017 and we’ve seen it in 2020 in just eight months, at record low yields. If you’re a small business, the Fed numbers show you that banks have tightened lending conditions on you… This dispersion may be good for the stock market, it may be good for ‘national champions’, but it will have huge social and economic implications down the road…”

“Remember what small business do. They’re not just large employers. They’re also the main way to have inclusive capitalism and an inclusive market based system, and if you want capitalism to be sustained, you need buy-in from a lot of people. You cannot get buy-in if it’s all about large corporations…”

As was the case in the years following the Global Financial Crisis, relying on the Fed to drive a recovery is a poison pill. Economic prosperity comes from ensuring free and fair competition, incentivizing productivity, and through entrepreneurship. A zombified corporate America surviving off of low rates and free Fed money is going to end up undermining support for free-market capitalism itself.

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