Money Game: Party is Over. However…

Senior Reporter Ryu Dae-hoon

wherearetacos@naver.com

 Looking back on 2008, after the subprime mortgage crisis, the Federal Reserve Bank (Fed) threw enormous amounts of money at companies and the market to avoid an economic catastrophe. After the U.S. Government drew up its budget, the workers on Wall Street had just one word: Crazy. Yet now, the same amount of money they spent to overcome the subprime mortgage crisis in total, has been diverted into the markets every three months since the COVID-19 crisis started. Stock price indexes reached their highest points in history. Luckily, and unluckily, COVID is coming to an end and now we should recognize, the party is over.

If you are following economic news, you will no doubt be fed up with the word, ‘tapering’. Tapering refers to the series of moves to retrieve large amounts of money from the market. The biggest reason they are willing to bring back money from the market is to control inflation. Last year, the U.S. yearly inflation rate reached 7%, which is the highest level since 1984, when financial systems were relatively unstable. As it clearly seems like things are not going as central banks wanted, they will keep executing high degrees of tapering policies. Market participants have already responded. Stocks, cryptocurrencies and bonds market have immediately reflected the news.

However, it is not time to panic and sell all one’s assets, nor is it time to be too passive in investing capital. Even after tapering, the era of inflation and investing is on the trend. There are two main reasons why. The first reason is that companies are enforcing price increases on their products. They seldom decrease prices even if circumstances take a turn for the worse. Their net revenues can be improved. The second reason is interest rates. Investors started to panic after hearing the news that the Fed could potentially raise interest rates up to seven times this year. However, we should focus on levels of interest rates, not on how many times they will threaten the markets. Even if they implement seven increases, it should still stay around 2% per year. We are living in an age of low interest rates. Even though there is a risk that asset prices will fall, we should also look out for the ‘upside risk’, when assets that we do not own see prices rise.