The Financial System is Broken, and Here’s Why

The Financial System is Broken, and Here’s Why
Photo by Luis Villasmil / Unsplash

The massive government handouts that have taken place over the past few years have distorted the financial system. This has led to a number of problems, including an increase in debt levels and a decrease in economic growth. In this blog post, we will discuss how these massive handouts have affected the financial system and what can be done to fix it

Since 2020, government handouts have ballooned to trillions of dollars.  This money has been used to support businesses, individuals and families affected by the pandemic. While this was a necessary step to help people cope with the economic fallout of COVID-19, it has also caused problems for the financial system.

The first problem is that government handouts have distorted incentives in the financial markets. For example,  when the government provides low-interest loans, it encourages businesses to take on more debt than they would normally. This has led to an increase in debt levels and a decrease in economic growth.

The second problem is that handouts have decreased the confidence of investors in the financial system. When investors see billions of dollars being handed out with no oversight or accountability, it erodes their trust in the system. This leads to less investment and decreased economic growth.

Finally, government handouts have also impacted the banking sector. Banks have been given access to trillions of dollars in lending capital which has enabled them to offer generous loan terms and lower interest rates on debt. As a result, borrowers are able to take on more debt than they can afford and the banking sector is at risk of becoming over-leveraged.

But perhaps the biggest problem is that extra money is sitting in people's bank accounts.

This has caused perhaps 1.7 million retirees to not come back into the workforce because they don't need to.  This has resulted in a decrease in economic activity, as those people are not spending money or creating new jobs. They have extra money so don't need to work as a greeter in Wal-Mart.

In addition, my techniques for forecasting the economy have been distorted.  The government's actions have led to an increase in the money supply, which has caused inflation. This, in turn, makes it more difficult to accurately forecast economic activity.

For example, normally, the shape of the yield curve is a great predictor of future economic activity. But the huge savings rate and low number of people looking for jobs has caused it to work but slower than usual. It usually predicts the economy about one year in advance but I think the massive government distortions have caused it's predictive horizon to change.

I will be pondering further the ramifications of the massive handouts in the coming days.