The ‘Road to Recovery’ Fallacy

Annika Lewis
11 min readMay 12, 2021


The general macroeconomic narrative going around in North America these days feels something like:

  1. The economy was doing great pre-Covid
    A year ago, we were hit with a once-in-a-lifetime economic shock that took an otherwise-stable economy into shaky territory.
  2. Covid hit, and now we’re on the road to recovery
    After necessary stimulus, stocks are climbing again and unemployment is back down to reasonable levels. The world is emerging from hibernation, ready to spend, and the economy is slowly but surely getting back on solid footing.

Over the past year since Covid hit, I’ve spent a disproportionate amount of my free time reading and seeking answers as to where the US economy truly sits. Despite being Canadian, I’ve focused primarily on the US economy, as the current dominant empire and custodian of the world’s reserve currency.

Back in 2020, I was pretty surprised to see US equities rebound as quickly as they did — when Covid hit, I really thought a lasting contraction had arrived.

Now, last year’s early Q2 blip is nothing but a distant memory, as seasoned investors & new Robinhood users alike pile into tech stocks at exorbitant multiples, as well as newly-hyped asset classes like crypto & SPACs.

For me, the anticipation of an extended crisis that I felt back in early 2020 still loudly remains. While I’d love to be wrong, I do not see a world in which the above ‘road to recovery’ narrative happily plays out.

Instead, my assessment of the situation at hand feels something like this:

  1. The economy was already on poor footing pre-Covid
    We came into this on very shaky ground, evidenced by an inflated money supply and an increasing wealth gap.
  2. We are not on the road to recovery — rather, the crisis justified and accelerated an already-loose monetary policy
    The US dollar devaluation has accelerated rapidly and the wealth gap has worsened. In spite of how things look on the surface, we’re in for a really tough decade ahead.

Next, I’ll articulate the arguments for both cases. I’ll call the first narrative the ‘road to recovery’ case, and my narrative the ‘doom & gloom’ case.

The ‘Road to Recovery’ Case

The ‘Road to Recovery’ case is what I would characterize as the ‘conventional wisdom’ case of today. It is the most logical and simplest case, and generally checks out if you don’t dig a level deeper. I’ll walk through supporting points for each argument.

Argument 1: The economy was doing great, and then Covid hit

The supporting points on this one are easy — if you look at the two most cited measures of economic strength, America passes with flying colors. All signs point to a boom that was cut short by an unfortunate event.

These two measures are, of course:

  • GDP per Capita
  • Unemployment Rate

On GDP per Capita: GDP per Capita rose to all-time highs throughout the 2010s, even when accounting for inflation


On the Unemployment Rate: Unemployment was at a twenty-year low, hovering below 4% prior to the shock.


All good, right? Looking at these charts in isolation, it appears that people were gainfully employed, productivity was at all-time highs, and America was thriving until Covid.

Argument 2: We’re on the road to recovery

The big question everyone asked a year ago was what letter in the alphabet the recovery would look like.

  • Would we rebound quickly and have a ‘V-shaped’ recovery?
  • Might the effect linger on and look more like a ‘U’?
  • Will we have a mini rebound and then crash again, creating a ‘W’?

If we look back, it’s clear that the recovery so far has been V-shaped in a big way. It took less than six months for the S&P 500 to surpass its previous all-time highs, and the market has been roaring ever since.

The sun is shining, we’ve got a vaccine being rolled out at a breakneck pace, the world is emerging from its Covid hibernation, and people are ready to get out there and pump their hard-earned cash back into the economy.

And, if we look at unemployment, we’re back down to healthy 2015 levels — the initial shock has, for the vast majority of the population, subsided. So we’re good, right…?

The ‘Doom and Gloom’ Case

The ‘Doom and Gloom’ case requires a deeper dive than surface-level metrics, and might make you squirm a bit. Getting a glimpse into the facts of this case — the money supply increases, in particular — has fueled my recent obsession with macroeconomics and curiosity in understanding how the economic machine works.

Argument 1: The economy was already on poor footing, and then Covid hit

In the Road to Recovery section, we saw that GDP per Capita and the Unemployment Rate were in great shape pre-Covid.

So how was the economy on poor footing?

To examine this, let’s look at two new areas that bring important context to the previous metrics:

  • For GDP per Capita → The Money Supply
  • For Unemployment Rate → The Wealth Gap

The Money Supply

Looking at the US’ GDP per Capita tells us the gross product, in dollars, per American citizen.

So, GDP per Capita is a more telling measure than just aggregate GDP since it has been normalized for the number of people in the country. Makes sense.

But, there is something else that we’re not normalizing for in the GDP per Capital formula. What if the value of a dollar itself changes? If the dollar itself has fallen in value by, say, 50% — then shouldn’t our GDP per Capita also fall by that factor?

While the US dollar had been relatively stable pre-Covid relative to other currencies, the dollar was quietly being devalued against itself in the decade leading up to the Covid crisis.

The chart below shows M2, a measure of US dollars in circulation — in oversimplified terms, how much money is out there in the wild.


Typically, M2 Money Supply grows along with the economy when times are good — so this continued increase could be, at a first glance, driven by solid US economic output.

Now, let’s look under the hood, at just the Monetary Base — referred to as ‘M0’ — which measures the actual money that the government has injected into circulation (versus the total money that exists, which is higher than that because of the fractional reserve banking system).

While M2 is a good measure of ‘how much money is out there’, stripping out just the Monetary Base itself gives us a crisper picture of the Fed’s direct actions impacting that money.

Let’s take a look at the Monetary Base over the past 50 years:

So…. what on earth happened in 2008 and beyond?!

By and large, the answer is Quantitative Easing, a term you’ve probably heard but don’t totally understand — just like me until recently.

If you look at the Wikipedia page for QE, the second sentence cites it as ‘an “unconventional” form of monetary policy, usually used […] when standard monetary policy instruments have become ineffective’.

Based on this definition, it makes sense that QE was enacted in the US in 2008, when things were in dire straits with the financial crisis, interest rates had already been dropped to near-zero percent, and there was nowhere else to turn.

So what does it do? You can basically think of Quantitative Easing as printing new money out of thin air — it’s more complicated than that, but for simplicity’s sake, that explanation will suffice. When you create more of anything, by definition you de-value that thing (supply & demand dynamics), and that is exactly what happens in the case of the US dollar and Quantitative Easing.

The problem is… QE never really stopped. After 2008, the unconventional policy quietly and gradually turned conventional, and markets relied on it. Any whisper of QE stopping and the markets tanked, which spooked the Feds and prompted them to keep it going.

It’s hard to understand the scale of QE in isolation, and I’ve found it helpful to look at the money supply increase as it relates to increases in the stock market.

First, remember how the markets absolutely crushed it in the 2010s? This chart showing the S&P 500’s rise should look pretty familiar — and validating — to anyone who was invested in the public markets in the past decade…

Now, let’s take a look at S&P 500 returns, but normalizing for money supply — which my new favourite website, Inflation Chart, does beautifully for us.

Those gains look…. well, I’ll let you see for yourself:

To clarify what the above chart is showing:

  • Green = Unadjusted S&P 500
  • Blue = M1, aka the amount of USD in circulation (M1 is yet another money supply measure that sits between M0 and M2 — don’t worry about the nuances here too much, I’m using M1 since Inflation Chart doesn’t offer an M2 view)
  • Red = S&P 500 normalized for the amount of USD in circulation (aka the green line divided by the blue line)

The trajectory of the red line over the past decade implies that that the stock market has actually been pretty flat over this period, in real terms. A pretty different picture than what you see on the surface.

The Wealth Gap

To round this section out, let’s go back to Unemployment. The Unemployment Rate tells us what share of people in the labour force are jobless, looking for jobs, and available for work.

A low unemployment rate is good, since less people who want jobs are unemployed. There was a massive spike as soon as Covid hit, and while we’re not quite back to pre-Covid levels, we’re in the realm of generally acceptable, so by and large, Americans are gainfully employed and able to provide for their families. Right…?

What the unemployment rate misses is any measure of income or wealth. Sure, the vast majority of the population might be flagged as ‘employed’, but is their employment giving them the quality of life they aspire to? Are middle class families able to work their way up and live out the American dream?

Source: New York Times

Historical data suggests that, no, while the rich have gotten richer, most Americans’ incomes have trailed behind. Low unemployment is great to see, but if the employment isn’t giving the employed what they need, we have a bigger problem on our hands.

Argument 2: We are not on the road to recovery — rather, the crisis justified and accelerated already-loose monetary policy

Remember that M2 chart we looked at earlier? Let’s see how things played out since Covid hit…


Since January 2020, M2 in circulation has increased from about $15 Trillion to $20 Trillion—within less than 18 months.

While that may not sound dramatic, let’s go back and again and just look at the Monetary Base (M0) — the one that got all weird in the 2010s:

Now, any guesses as to how that chart looks when you add 2020 and 2021 to the picture?

Brace yourself…

Yep, since January 2020, the Fed has increased the Monetary Base from about $3.4 Trillion to $5.8 Trillion within less than 18 months. That’s 1.69x, or a CAGR of about 53% — on something that, pre-2008, averaged a growth rate of about 6% a year.

In short, what all of this means is that no matter how good GDP per capita — or any other USD-based measure — looks, money is worth a lot less than it was a few years ago.

Oh, and, for simplicity’s sake, we haven’t even talked about the rest of the Fed’s Balance sheet — which makes the picture look even more grim.

While you may have noticed prices rise on certain things, you probably haven’t felt a 30%+ increase in your groceries… not yet, at least. If you didn’t understand why talk of inflation is accelerating, now you do.

And, I don’t need to tell you that the wealth gap we discussed earlier has increased even further since the Covid crisis — but if you’d like to learn more about it, see here, here, or here to start.

What’s ahead?

If you believe, like I do, that we’re currently in the ‘Doom and Gloom’ scenario, there are two potential ways out.

Option 1: A graceful unwinding

Maybe we come back from this. Maybe the Fed tries unwinding, like it did in 2018–19, and succeeds this time, absent of another global pandemic or similar black swan event.

That’s probably the cleanest way we come back from all this in one piece. But it’s really, really hard to do.

Option 2: A Massive Devaluation

Maybe we don’t succeed at bringing QE back from conventional → unconventional, and we face the fate of Japan.

Maybe it’s a slow devaluation, where people very gradually shift to hard assets like gold, real estate (and possibly decentralized, non-sovereign currencies?!)— or maybe it’s a fast-and-furious crash.

Either way, Option 2 is likely to be ugly for the global economy, and ultimately poses big questions about the US empire and its future as the world’s reserve currency leader. And the US isn’t alone — other countries have been heavily employing QE, too, so this is problem bigger than just America.

That’s a discussion for another day.

In Closing

This is the stuff that keeps me up at night, and studying & discussing this with friends over the past year has been some of the most fascinating work I’ve ever done. Thanks in particular to David Phelps, Arman Mottaghi, Marko Jelavic, and Eric DiMicelli for providing feedback on this post.

Whether this resonated hard or you violently disagreed with it, hit me up if you’d like to chat — I write as much to learn from others as I do to structure my own thoughts. Although I’ve learned a lot about how the economic machine works, I’ve got a ways to go yet.

Finally, I’ll call out two major sources of inspiration that have massively helped my thinking on all this — Ray Dalio’s ‘Changing World Order’, and Adam Baratta’s ‘The Great Devaluation’. I highly recommend both.