THREAD: The economic harm of trying to induce short squeezes

What's the economic harm? Obviously, if a bubble forms that bursts, extreme wealth transfer will occur from late buyers to early buyers. On net, that impairs balance sheets, w/ negative effects on the larger economy.

But there's a deeper harm that people forget about: capital raises. The squeezed company's get the ability to raise large amounts of capital at inflated prices, which leads to capital misallocation.

Consider the irony in the $GME case: the fact that too many people believe that a company's services are economically USELESS, and have bet on its failure, is now causing the company to get access to large amounts of ADDITIONAL capital at absurd prices.

Probably not a large economic harm in the specific GME case, and not really a concern at the moment b/c unemployment is high. But in the long run, that kind of capital misallocation can lead to "full employment" economies that are less robust.

When the newly raised funds eventually run out & GME has to wind down, the providers of the new capital will incur losses that would not have otherwise occurred. Also, the jobs created/preserved will have to re-transition. That's recessionary.

Extreme example: suppose we get to full employment by having government print & give $10 trillion to $GME, so it can build new stores & hire new employees across country. An artificial "retail renaissance." But then shorts end up being right, nobody uses any of it, & GME fails.

In printing and spending the money, we will have dramatically increased the financial wealth of the private sector (i.e., its purchasing power) w/o having increased its real wealth (i.e., its ability to produce the things that consumers actually want to purchase).

The result: inflation pressure at the artificial full employment condition, and a need for higher real interest rates to slow down economic activity.

When GME fails, all the construction workers hired to build the unwanted stores, and all the GME employees hired to man them, will have to go through layoffs and new job search processes. Not a small thing.

Rather than uselessly shuffle them around like that, would've been better to just give them generous funding to carry them thru unemployment, & let the system naturally draw them into jobs based on what consumers, thru their spending, actually ask for the economy to produce. /END