The Extra Money Is Coming to Bite Us!

Klarna has dropped its valuation to $6.5B from its peak valuation of $45.6B in June 2021. This is a massive rationalization of valuation. It is obscene what is happening in the market.

What has happened in last 12 months? Well, the answer lies in 2008.

This is the result of generous printing of money since 2008 financial crisis. An estimated $35 trillion has been printed by different federal banks around the world. To overcome the financial crisis, governments around the world had bought back toxic assets in 2008 by printing money. That was an emergency pill and had to be done. But we never stopped printing as the crisis evaporated. Instead, we continued the party. Covid made things worse. Governments printed more money to assuage the situation financial crises of common people. US alone printed $3 trillion between Apr’20 to June’20.

This was a humane response and expected from government of the land in one of the worst health crises in last 100 years.

As things were getting back to normal, a war breaks out. Disturbing the supply chain even further. Oil price heats up, commodity prices heat up sending the inflation off the roof around the world and governments can’t afford to print more money to put in the hands of people.

As it happens, extra money now needs to be suck back from the system. If we need to take back the money that we have printed since 2008, we are talking about 1/3rd of the world GDP. Now even at moderate pace, this might take 2–3 years to take back some of the extra money if not all. The pace, of taking back the money, will depend on how much public pressure is on the governments around the world to ease inflation. Politicians need to run a country and they can’t stay in power with an angry and upset voters with not enough money to buys stuffs. Even in best case scenario, we are looking at 18 to 24 months of slow down if not recession. Either way next 12–24 months are going to be tough.

Only silver lining for us in India is that, our policy makers have been conservative in printing more money during the Covid crises. That my friend has stopped the inflation going close to or crossing double digit mark.

Economics at some level is an irrational science, it is driven more by sentiment than we are ready to accept.