February marked another successful month on the international stock markets. Both the S&P 500, which tracks the shares of the largest US companies, and the DAX, which follows the largest companies in Germany, increased their record levels, growing by 3.1% and 2.6%, respectively, measured in euros.

If stock prices were the only source of information against which to assess the global economy, it would be difficult to imagine a better time. What is not clear from the movement of stock price indices is that several countries that play an important role in the world economy have essentially been closed off to foreigners for almost a year to prevent the spread of the coronavirus. In addition, stock prices do not reveal that the offices of many European and North American companies are still, at best, half-empty and that those who can work from home.

While vaccines that protect against the coronavirus have hit the market, the vaccination process itself requires time and resources, so our daily lives may not return to normal anytime soon. For example, it appears likely that only local audiences will be allowed in the stands at this year’s Tokyo Olympics.

In 2020, the US economy shrank by 3.5% and the German economy by 5.3%, according to the OECD. Globally, the economic downturn was at 3.4%. It may take a year or two for the world economy to reach pre-crisis levels, and this will depend on several factors, including the speed and effectiveness of the vaccination effort.

The stock market time horizon has become ever shorter

The social and economic impact of the COVID-19 pandemic is likely to be long-lasting. 2020 was more than just one year of negative growth: governments and companies spent reserves that were clearly insufficient and were forced to take on more debt. This is likely to result in higher taxes and fewer opportunities for future investments.

I am amazed that stock markets, which are regarded as forward-looking, do not consider this. The probable explanation behind this is that the concept of the future itself has changed: we do not think much beyond the next quarter, year or election cycle. In the world’s major cities, goods purchased online are delivered on the same day – often within a few hours – and securities transactions are made in microseconds (1/1,000,000 sec).

The stock market manages to consider support measures by governments and central banks credited to accounts in the following month or the next quarter. Still, loan repayments and the likely increase in the tax burden are too far in the future for many investors. It makes sense that someone inside the bubble does not and cannot see the bubble themselves.

Time will tell whether and how the coronavirus crisis will change the relationship, expectations and responsibilities between the individual and society. Unlike the financial crisis of 2008, which was a predictable result of human greed, the current coronavirus crisis is an exceptional setback. Overcoming it will require exceptional and coordinated solutions. If government intervention ever helps at all, now is the time.

A teetering house of cards

In almost all G20 countries, governments have spent much more to support the economy during the current pandemic than during the 2008 financial crisis. This time, according to the Atlantic Council think tank, the United States has spent 25% of its GDP (vs 6.5% during the previous crisis), Germany has spent 11% (vs 3%) and France 7.7% (vs 1.2%).

The coronavirus pandemic is unlikely to be the last crisis to hit humanity. It cannot be ruled out that before we overcome the current health crisis, the house of cards that governments and central banks have designed over the last 20 years, built with cheap credit and patched up with increasingly bigger loans, will collapse. The logic of an ever-higher debt burden coupled with ever-lower interest rates makes no sense if no collateral is added. Anyone can test this by asking the bank for a loan two to three times higher and checking whether the interest rate rises or falls.

Can we rely on help from governments and central banks in the future, and to what extent? Interest rates are already in the red – how much more can they be lowered? In the long run, is this kind of monetary policy not doing more harm than good and is not itself a source of problems?

The big question is how much can and should we rely on the state in the future, and how much should citizens themselves be responsible for preparing for the inevitable setbacks of life, whether human-made or natural.

How much can we rely on the state and the government?

I grew up in a time when all aspects of life were controlled and organised by the state. This system kept deteriorating until it finally collapsed. At the same time, the free world functioned on the principle of personal freedom and responsibility.

Ronald Reagan characterised the spirit of the time in his 1986 statement: “The nine most terrifying words in the English language are: I’m from the government, and I’m here to help”.

Even though civil liberties have increased in recent decades, it appears to me that there is less and less willingness to take responsibility and more and more reliance on help from the government. However, there can be no freedoms without responsibility. This may mean that there will either be fewer freedoms in the future or that there will be a need to take personal responsibility.

I am concerned about how governments and central banks have sought to control more and more of the economic environment in recent decades. I believe they have done so with good intentions, but the result has been a transfer of responsibility from the citizen to the state. An increase in regulation has also led to an increase in the concentration of economic power. However, if economic power were less concentrated and responsibilities more widely shared, society, the state and the economy would be stronger and better able to cope with occasional crises.

The 2002 pension reform aimed to partially detach pensions from the state budget and place a portion of the responsibility on citizens. This reform that took place 19 years ago was driven by politicians who shared the same values as former leaders of the free world Ronald Reagan and Margaret Thatcher. The pension reform of 2020 was also pushed through while flying the flag of freedom.

The spirit of the two different eras and the shortening of the time horizon are reflected well by the fact that the goal of the first pension reform was to gradually reduce the role of the state in the pension system, while the people behind the last pension reform claimed that nobody knows what the future holds, that “money is free” right now, and everyone is at liberty to spend it or use it straight away and however they wish.

The disruptors of the pension system reasoned that as long as wages are increasing, there is no point in saving and investing. For them, talk of saving and collecting amounted to a headache. Instead, they promised that when you retire, it would be your children who will take care of you, or you would have a choice to vote for a party that would increase your children’s taxes to raise your pension.

We help to amplify the growth of pension assets with returns

I hope that the larger part of society has a more long-term perspective on time and that development and improvement will be valued more than dismantling and reckless spending. The goal of LHV pension funds is to offer pension investors a long-term return that exceeds both the inflation rate and wage growth.

To achieve this goal, we prefer to invest in local projects where risk and return justify it. Of course, pension funds actively managed by LHV compete with all other Estonian pension funds. Still, we differ from others in that we are primarily focused on the pace of inflation and wage growth while placing less emphasis on the ups and downs of stock indices.

We aim to offer our customers the opportunity to invest in assets that are not available for investing in the stock exchange or for smaller amounts.

Responsibility is the price of freedom. Anyone can think about the implications on governments’ purses in a situation where the population is ageing and the loans taken to combat past crises need to be serviced at a time when no one is offering cheap loans anymore.

Only by accumulating your own reserves can you be the master of your own future.