The Hidden Cost of Preventing Economic Collapse

When the global economy ground to a halt in March 2020, central banks and governments unleashed the most aggressive economic intervention in modern history. The Federal Reserve slashed rates to zero, European Central Bank expanded its balance sheet by €1.85 trillion, and governments worldwide deployed $16 trillion in fiscal support.

The immediate goal was clear: prevent economic collapse at any cost. Mission accomplished—but the bill is now coming due.

The Success Story's Dark Side

By most measures, the intervention worked. U.S. unemployment plummeted from 14.8% to 3.5%, while European economies avoided the predicted depression. Stock markets not only recovered but soared to record highs, with the S&P 500 gaining over 100% from its March 2020 lows.

But success came with unintended consequences. The flood of cheap money didn't just save the economy—it fundamentally altered it. Asset prices disconnected from economic fundamentals as investors, flush with stimulus cash, bid up everything from stocks to real estate to cryptocurrencies.

The result? A tale of two recoveries. Those with assets saw their wealth multiply, while renters watched housing costs spiral beyond reach. The median home price in the U.S. jumped 40% in just two years, pricing out an entire generation of first-time buyers.

When the Medicine Becomes the Disease

Inflation, dormant for decades, roared back with a vengeance. U.S. consumer prices peaked at 9.1%, the highest since 1981. European inflation hit 10.6%, forcing central banks into an uncomfortable about-face.

The Federal Reserve, which had promised to keep rates near zero through 2024, began raising them aggressively in 2022. The Bank of England followed suit, despite warnings that higher rates could trigger the very recession they'd worked so hard to prevent.

Now comes the delicate dance of unwinding years of extraordinary support without crashing the economy. It's like performing surgery on a patient who's become addicted to the anesthesia.

The Moral Hazard Question

Perhaps more troubling is what economists call "moral hazard"—the idea that preventing all pain creates perverse incentives. If governments and central banks always step in to prevent recessions, do markets lose their natural correction mechanisms?

JPMorgan Chase CEO Jamie Dimon recently warned that constant intervention has created "zombie companies" that should have failed but were kept alive by cheap money. Meanwhile, productivity growth—the engine of long-term prosperity—has stagnated in many developed economies.

The intervention also raised uncomfortable questions about fairness. Small businesses struggled while large corporations accessed cheap credit. Essential workers risked their health for modest wages while asset owners saw their portfolios soar from the safety of home offices.

The Next Crisis Dilemma

Perhaps the biggest concern is what happens when the next crisis hits. Government debt levels have exploded—U.S. federal debt now exceeds 130% of GDP, while European nations face similar burdens. Central bank balance sheets remain bloated despite recent attempts to shrink them.

Will policymakers have the same firepower for the next emergency? And if they do, what happens to an economy that's become dependent on constant intervention?

Some economists argue for a return to "creative destruction"—allowing weak companies to fail and markets to clear naturally. Others warn that such an approach would cause unnecessary human suffering and could trigger a deflationary spiral.