After nearly a year of living with COVID-19, the public health aspects of the disease are now well understood. But the economic impact of the crisis continues to mystify.

On the one hand, the pandemic has triggered the most severe recession in living memory: national income has collapsed, unemployment is rising, and many households and businesses are struggling to survive.

But on the other hand, stock markets are booming, house prices are soaring, and the rich appear to be getting even richer. How can this be reconciled?

The frenzy surrounding the troubled US video game retailer, GameStop, provides a useful case study. After years of struggling to keep pace with online competition, many analysts expected that COVID-19 would be the final nail in the coffin for the high-street retailer. Sensing a vulnerable victim, hedge funds swooped in and placed big bets that the share price of GameStop would decline (known in the industry as ‘short selling’).

In another universe, the story would have ended here: GameStop would have continued to decline, hedge funds would have cashed-in, and barely anyone would have noticed.

But things didn’t quite turn out that way. Instead, the share price soared from $20 on 11 January to a high of $483 last week, representing one of the greatest stock market rallies of modern times. The official narrative is that an army of amateur investors organised on the online forum Reddit to purchase GameStop shares and drive the price up. In doing so, they managed to inflict significant financial pain on the hedge funds who had bet against the company, while making a tidy profit themselves.

Commentators were quick to hail the GameStop story as a triumph of ordinary citizen investors over major Wall Street speculators. Alexis Ohanian, the co-founder of Reddit, described the event as a “bottom-up revolution” that has irreversibly shifted power to small investors.

While this ‘David vs Goliath’ narrative undoubtedly captured the world’s imagination, the reality is less romantic. It is now widely believed that well-resourced professional traders played a major role bidding up the share price by posing as ordinary members of the public on Reddit. Some have gone further and suggested that much of the share price volatility has been driven by “internecine hedge fund warfare” – hedge funds covertly placing large bets against each other using the Reddit media frenzy as a convenient smokescreen.

Either way, the fact that GameStop’s biggest shareholders are some of the world’s largest investment firms such as BlackRock and Fidelity should pour cold water over the idea that this was a battle between big finance and small plucky investors. It was these Wall Street behemoths – not Reddit users – who stood to gain the most from the boom.

Regardless of who the key instigators were, it’s true that many ordinary people jumped on the bandwagon in the hope of making a quick buck. This phenomenon isn’t new: over the past year there has been a surge in so-called ‘retail investing’ – small-scale investments made by ordinary individuals rather than professional, institutional investors. Many analysts have attributed this to the rise of user-friendly apps such as Robinhood, which have made investing in financial markets much cheaper, easier and more accessible for individuals with little investment experience.

But another reason for the rise in retail investing is the COVID-19 pandemic itself. The introduction of lockdowns and social restrictions has disrupted the circulation of money in the economy, creating distinct groups of winners and losers. On the one hand, households that have managed to maintain their incomes throughout the pandemic have found they have accumulated significant savings each month, as their expenditure on entertainment, leisure and travel has dramatically reduced. The flipside of this is that businesses operating in these sectors have seen their revenues collapse, and workers have been laid off or placed on furlough schemes. Money that would normally have been spent in cafés, bars and restaurants is instead piling up in the bank accounts of the middle-class.

The Bank of England chief economist, Andy Haldane, recently estimated that UK households saved £100bn more than usual over last year. To put this in context, this is more than double the UK’s annual budget on the military and defence. A similar trend has been observed in the US and elsewhere.

So while the pandemic has imposed severe economic hardship on some, others have faced a very different dilemma: what to do with a newly bulging bank balance? How people spend or invest these savings will have a material impact on the shape of the economic recovery. For some the answer has been to buy a bigger house, while for others it has been to start dabbling in the stock market.

According to conventional economic theory, this shouldn’t be a problem. The textbook function of financial markets is to take money from savers and lend it to firms who will invest it productively. But as the GameStop frenzy illustrates, modern financial markets have almost nothing to do with financing productive new investment, and everything to do with speculating on the price of existing assets.

In recent weeks billions of dollars have been ‘invested’ in GameStop shares, but not a single penny of this money has gone to GameStop. Instead, investors have been buying already-existing shares (or ‘options’, which give the holder the right to buy the underlying share at a set price by a certain time) from other investors in the hope that they will be able to sell them on to someone else for a higher price. In effect, they have been playing a giant game of pass the parcel – buying and selling to each other at ever-higher prices until the music stops, at which point everything goes into reverse.

At the start of 2021 GameStop’s share price was $17, valuing the company just over $1bn. At the height of the trading frenzy last week the share price had skyrocketed to $483, meaning the company was valued at almost $35bn – an increase of nearly 3,000%. At the time of writing the share price has collapsed again to $90, leaving the company valued at around £6bn. Throughout this period the company itself – its operations, staff and assets – has stayed the same.

Far from “democratizing finance for all”, the GameStop frenzy has the hallmark features of a classic ‘pump and dump’ Ponzi scheme. Some of those responsible may well have made a tidy profit. But it is ultimately a zero-sum game: for every winner, there is an equal and opposite loser.

In 1936 the renowned economist John Maynard Keynes wrote that “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” Keynes was writing about stock markets like the London Stock Exchange, but the same can be said about new platforms like Robinhood. They are vehicles for speculation, not investment, and their ultimate purpose is wealth redistribution, not wealth creation.

The household savings built up throughout the COVID-19 pandemic could – if mobilised effectively – play an important role in driving the economic recovery. From combating climate change to improving public transport links, there is no shortage of investment needs.

But matching these savings with socially useful investment opportunities requires a financial system that puts the long-term interests of society before the short-term interests of speculators. This can’t be achieved overnight. But a good place to start is to call the speculation that powered the GameStop frenzy what it really is: socially useless gambling that ultimately does more harm than good.