Working-From-Home Is A Risk For Our Fragile Economy

Staying home for our safety has caused a dangerous liquidity trap to form

Edward Iftody
Mar 3 · 7 min read
Gotta finish this report before I turn on the TV — Photo by Mahmud Ahsan on Unsplash
  • Why continuing remote work could strengthen the liquidity trap
  • Why getting out of a liquidity trap creates economic risks
  • Final thoughts

What is a liquidity trap?

A good old-fashioned liquidity trap is when interest rates are already extremely low and at the same time, investors start hoarding cash rather than investing it because they’ve lost confidence in the economy.

  1. On the other hand, if central banks fail to achieve low inflation targets the recession may continue. If the recession continues long enough, company profits will be hurt and elevated stock prices will have to re-set lower.
  2. Interest rates may have to be raised quickly. If in an attempt to escape recession central banks allow inflation to get too far ahead of targets, interest rates may need to be adjusted higher to cool the economy. This risks triggering a Japanese-style deflation. Obviously, if deflation starts a negative wage-price spiral, it’s bad for stocks, real estate prices, and the health of the economy.

The 2021 liquidity trap comes with an unusual twist

The newly formed 2021 liquidity trap is special because it comes with an interesting twist – people are saving unusually large amounts of cash but not necessarily because they have lost confidence in the economy. Of course, some people fear their unemployment benefits will run out and they won’t be able to find a job with unemployment still stubbornly high. However, many people are doing just fine but are also saving unusually high amounts of money simply because they are working from home.

Why continuing remote work could strengthen the liquidity trap

When central banks lower interest rates they’re not trying to increase the prices of stocks or real estate. Central banks lower interest rates when they are trying to decrease the unemployment rate. Getting people back to work and spending money ends recessions. The liquidity trap could continue to strengthen if people anticipate more bankruptcy and high unemployment due to weaker than normal consumer spending.

The Washingon Post

The Café and Aurora Sports bar – Fairview, Canada

Fairview is far from any big city but that has not saved local businesses from the devastating effects of the pandemic. Even though Fairview is mainly a farming community, the work-from-home trend still has had a significant impact on local businesses.

Why getting out of a liquidity trap creates economic risks

Traditional ways to get out of a liquidity trap include;

  1. raising interest rates (bad for stocks and bonds, particularly if they rise too much or too quickly),
  2. or increased government spending to create jobs and get more money into the hands of everyday people (what the Democrats are trying to do with their $1.9 trillion COVID bill and $15 minimum wage).

Final Thoughts

This liquidity trap will eventually end one way or another. How this liquidity trap ends is likely to have significant consequences for investors. Of course, diligence, research on stocks investors own, and an investment strategy are all needed. However, ultimately how the liquidity trap ends might not be the biggest problem over the longer term.

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Edward Iftody

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Edward Iftody is a Communication Coach, author of Surviving Work, a veteran of the Canadian fin-tech industry and a blockchain enthusiast.

Iftody.com

Today’s Most Disruptive Technology Companies and Innovations — Long Form Articles for Investors

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