Sorry to disappoint you all, but this post is not about a beauty pageant for econ students, or an only fans page. And now that we have your attention, what we’re on about here is the knock-on effect of the allocation of capital, or rather, its misapplication.

Many of our followers have heard us talk about this before, but because we’re seeing more and more signs with each passing week, we thought a fresh look was warranted.

There are many unintended effects from all the economic stimulus we’ve received from central banks and Congress over the last decade. Some are patently obvious, and some we probably haven’t even identified yet. But one of the most concerning should be how the gross misallocation of all that money is now and will continue to impact global economies in the decades to come.

Under the free-market theories many in our industry hold to, capital naturally flows where it’s most beneficial.

Now, some of the fiscal stimulus (from Congress), particularly during the pandemic, went to places that truly and desperately needed it, and it saved a lot of pain. But as with any such tools that are new, there was a great deal lost to fraud and waste. What we’ve seen for the most part from both the fiscal and monetary (that comes from The Fed and other global central banks) however, is that under the legal and regulatory framework that’s developed over the last forty years, capital has flowed to absurdities like share buy backs, crypto, and Special Purpose Acquisition Company’s. Yes, this has driven stock prices higher. Yes, mom and pop investors have seen their 401(k) statement values go up. But whatever mom and pop saw in their 401(k)s has been consumed by inflating costs in housing and just about everything else. Share buybacks and SPACs primarily benefit the C suite and the bankers. Crypto benefits, well, people like Sam Bankman-Fried.

All of this comes at the devastating expense of niceties like education, infrastructure, and health care. Yes, the Infrastructure Investment and Jobs Act has begun to direct some of this stimulus, but only after decades of infrastructure neglect.

In our day to day, we talk to people from all walks of life. And we see and hear signs that the neglect in these areas has resulted in a state of near complete dysfunction. Schools can’t incentivize people to become teachers. Health care workers are quitting under health problems from the burnout. And smaller scale projects move at a snail’s pace or come to a grinding halt because small businesses can’t find or train people to fill empty positions. We see the knock-on effects in financial institutions too. Insurance companies are refusing to write new business because their claims are exploding. At the banks, of course credit availability is tightening. It is especially pronounced in service delivery. We spend increasing amounts of time wrestling with these companies just to get them to fulfill their most basic functions. We sometimes wonder how anything gets done at these institutions.

At some point, the reckoning for these neglected areas will come, and they will require exponentially more money than ever would have been needed before. This is the most concerning unintended consequence of misapplied stimulus of all.

This will make the symptoms of inflation we’ve seen so far seem like the warm embrace of an old friend.

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