I’ve said it before, and I’ll say it again: There is never a “good” time for a pandemic, but the timing of this one is particularly unfortunate.
The world is coming off a year during which global growth and trade was the weakest since the crisis. Thanks in part to misguided nostalgia for the mercantilism of a bygone era, global trade volumes contracted in 2019 for the first time since the GFC.
That makes the current situation (wherein global commerce is imperiled by quarantine measures and travel restrictions associated with the virus) all the more precarious. Suffice to say the IMF projection shown in purple below is almost certain to be marked down dramatically in the next update.
The global economy is facing a severe recession, from the US to Europe to AsiaPac. Estimates out this week (and last) from Wall Street’s major banks were chock-full of dour projections, even as most include expectations for quick rebounds once the epidemic abates.
The timing is particularly bad for monetary policymakers. Last year, in a bid to offset the drag from trade frictions and otherwise “make up” for 2018’s effort to normalize policy (an effort which dead-ended in Q4 of that year with what, at the time anyway, seemed like a deep selloff for risk assets), central banks unleashed a barrage of rate cuts, leading to the largest net easing impulse in years.
Policymakers thus came into 2020 with their medicine cabinet almost completely bare. At the same time, there was little in the way of evidence to suggest that the easing delivered in 2019 was set to produce a robust bounce in activity and/or inflation expectations, and some economies (e.g., Germany) were still mired in a deep slump.
Then came COVID-19.
Predictably, the fiscal response has been slow, and although politicians are coming around to the necessity of doing “whatever it takes”, steps taken thus far have been inadequate. Central banks, meanwhile, have deployed a staggering amount of easing over the past seven days. In fact, there have been more than three-dozen rate cuts globally over the past week.
The Fed, the ECB and the BOE committed to a combined $1.74 trillion in additional asset purchases over the past seven days.
Throw in the incremental QE announced at the scheduled March ECB meeting, and the figure is nearly $1.9 trillion.
Do note: That only counts the Fed’s new QE, the BOE’s new buying and the ECB’s “PEPP” plus the additional QE announced by Christine Lagarde prior to the emergency rollout of the pandemic facility this week. In other words, it doesn’t take into account the myriad liquidity levers being pulled globally (e.g., repos), nor does it account for Australia’s newly-launched QE program, or the BoJ’s increased ETF buying.
Of course, without fiscal stimulus, none of that will be enough. As entire economies shut down (including the largest economy on the planet), politicians will need to step up to the plate. Here’s an excerpt from Kevin Muir’s Wednesday MacroTourist note:
Over the past few days, I have sensed a dramatic change in attitude among governments. Trump sent Mnuchin off to create a fiscal coronavirus rescue package. Mnuchin came back with a $850 billion proposal. Instead of rubber stamping the plan, Trump shot back – “why not make it a trillion?” Realizing which direction the wind was blowing, Mnuchin spent the next few days corralling lawmakers until they had agreed on a $1.2 trillion fiscal package. This attitude has percolated throughout the world. Even the Germans have finally relaxed their budget rules and are firmly in the camp of “we will do what’s needed to save the economy.”
Governments realize this is not a financial crisis, but a humanitarian crisis. They finally understand that the economy has been hit with a massive demand shock, and the only entity capable of offsetting that collapse is the government.
There are no Austrians in foxholes, folks. When the bullets really start flying, everyone prays to Keynes.
The Trump administration on Saturday suggested that the next round of stimulus in the US could sum to more than $2 trillion. “They’re all negotiating and everybody’s working hard”, Trump said at the daily virus briefing. “I think we’re getting very close” to a bill.
Several weeks back, SocGen’s Albert Edwards suggested an end to the “Ice Age” (his most famous thesis) on the premise that, eventually, governments would resort to some form of MMT with monetary policy exhausted. In essence, he argued that following the next downturn, the world will resort to helicopter money, which will be “successful” in taking a blow torch to the permafrost, even as it rapidly erodes everyone’s purchasing power.
Fast forward less than two months and the next downturn is here thanks to the containment efforts associated with the COVID-19 fight. As Kevin alludes to in the excerpted passages above (and makes mostly explicit in the full note), politicians have all the cover they need to enact massive fiscal stimulus – the virus has made sure of that. It’s now just a matter of will.
In his latest note, Edwards dedicates the better part of 8 pages to this discussion.
“At times like these, it is the job of the fiscal and monetary authorities to take the strain and they always do”, he writes, noting that “public sector borrowing always expands during recessions as the private sector retrenches – in a mirror image”.
What’s different this time, he says, is that monetary and fiscal policy aren’t working at cross-purposes.
“The size and synchronization of the fiscal and monetary stimulus represents a sea change in policy aggression that for us has begun to cross, if it has not already, the Rubicon”, Albert goes on to say, adding that this moment was inevitable, but the deep recessions that are invariably in store for the world’s largest economies simply brought things forward. Here’s Edwards:
Certainly the rapidity of the collapse in financial markets and the likely unfolding economic slump has accelerated the policy response I anticipated. The political and popular backlash that could restrain a policy response to a ‘straightforward’ economic crisis (if there is such a thing) is now non-existent. The fiscal authorities will be able to enact virtually any policy measure they consider necessary. “Whatever it takes” is the mantra as some countries, notably in France, where President Macron has said no company will be allowed to go bankrupt in the current recession. That will indeed necessitate a massive fiscal and monetary commitment. And talk of $1,000 checks being posted to everyone in the US is perhaps one step towards the Universal Income I see discussed in progressive liberal circles.
Of course, even as central banks have deliberately timed their recent announcements of various easing measures to coincide with the rollout of fiscal initiatives, we’re still not quite to the point of overt deficit financing.
Albert, in a conversation with Gerard Minack, wonders if the distinction even matters anymore.
“The current episode of QE, which may not be termed monetization by economic purists, is in the same direction as the fiscal expansion”, Edwards writes. “Gerard and I decided in our discussion that my own wish to see a clear distinction between a central bank buying in the primary (as opposed to the secondary) market may in this circumstance be like the medieval scholarly argument of how many angels could dance on a pin head!”
And, as if on cue, “Squad” member Rashida Tlaib unveiled the “Automatic BOOST to Communities Act” on Saturday.
“In response to the Coronavirus crisis, the Automatic BOOST to Communities Act would immediately provide a US Debit Card pre-loaded with $2000 to every person in America”, the congresswoman writes. “Each card would be recharged with $1,000 monthly until one year after the end of the Coronavirus crisis”.
You can read the full proposal below.Automatic Boost to Communities Act