The writer isa professor of economics at Harvard University and was first deputy managing director and chief economist of the IMFThe disconnect between the historic disruption to energy supplies — with the Strait of Hormuz closed and Brent crude hovering around $100 a barrel — and the S&P 500 reaching new records is stark. AI optimism and strong earnings are clearly providing a strong tailwind. Even so, risk is mostly being disregarded as the Wall Street fear gauge, the Vix, has barely increased relative to its historical average.
Many attribute this to the belief that “Trump always chickens out”, the so-called Taco trade that rules out worst-case scenarios. But stock market highs could also reflect what I call the Bliss trade: a belief in resilience underwritten by “big lasting state support”. Such a belief is consistent with government actions over the past several years, actions that have driven public debt levels ever higher and expanded central bank balance sheets. Global public debt is now projected to reach 100 per cent of GDP by 2029.
During the pandemic, the balance sheets of households and firms were not just rescued but boosted by very large government support that averaged 25 per cent of GDP for advanced economies, including assistance in the form of equity injections, loans and government guarantees to companies. This boost has buoyed consumer and business finances for several years.