Revenge of the old economy

Prices in the real economy are lagging far behind prices on the financial markets. But with a historic amount of stimulus, focused increasingly on an ‘old school’ recovery, a catchup appears to be in the making. Not before time.

The graph below from Goldman Sachs is currently one of my favorites. All things linked to inflation – so, not only consumer prices but also wages and commodities – have failed to keep pace with prices on the financial markets. Not surprisingly, as monetary policy, and to some extent also fiscal policy, has focused exclusively on the financial markets since the global financial crisis.

Back in 2008, that made sense. The entire system was on the verge of collapse. But in the ten subsequent years of recovery, little changed. As inflation continued to disappoint, the same instruments, interest rate cuts and quantitative easing were used time and again. Without the desired result. Real economy prices barely rose at all and the majority of the liquidity flowed to the financial markets.


But the Covid-19 crisis might bring this to an end, as it offers the real economy the opportunity to really join in again. Unlike during the global financial crisis, fiscal policy is now mainly targeted at the ‘real economy’; in other words, business investments and consumer spending. The policy is aimed at bringing about so-called ‘multiplier effects’, whereby stimulating growth automatically leads to further acceleration in growth. An old school economic recovery of the real economy usually also pushes up prices in that economy.

Commodities are a good example of this because of a number of reasons. The first reason, as already referred to above, is because the current stimulus is aimed at a recovery in demand from both businesses and consumers. More demand for goods means more demand for commodities.

In addition, there is increasing consensus among governments and societies that the gap between rich and poor has become unacceptably large, which will likely lead to fiscal stimulus being proactively targeted at low-income households. These families consume a larger volume of goods, which also drives demand for commodities.

Moreover, fiscal stimulus offers the opportunity to accelerate the achievement of sustainability goals. An increasing awareness of the global challenges in the area of sustainability will in the coming years trigger a wave of green investments in capital expenditure.

Rich-poor divide

Greater attention to the divide between rich and poor as well for a sustainable society in general should also translate into a wage increase for low-income householders in particular. As a result, the chance of a further rise in social unrest will decline. This is important, because history tells us that the level of social unrest often soars after a pandemic, and this time is no exception.

A more balanced division of between company earnings and wages can mitigate this to a large extent. And ultimately, asset classes such as equities will reap the fruits from this, too.

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