The new coronavirus is unfortunately deadly not only for humans but also for the global economy. The central banks have shot their bazookas, but the monetary policy is helpless during pandemics with their supply disruptions and self-quarantine that effectively freezes the economic activity. Interestingly, even the central bankers seem to acknowledge their impotence. As Jerome Powell said during his recent press conference:
“We don’t have the tools to reach individuals and particularly small businesses and other businesses and people who may be out of work… we do think fiscal responses are critical.”
It didn’t take long to persuade the governments to intervene and increase their spending. For example, Spain announced a $220B stimulus package or almost 16 percent of its GDP. The UK unveiled even larger stimulus: an unprecedented $400 billion financial rescue package, amounting to almost 15 percent of GDP, to “support jobs, incomes, and businesses”. Germany went even further: the country authorized its state bank, KfW, to lend out as much as $610 billion, or almost 16 percent of GDP, to companies to cushion the effects of the coronavirus.
Trump has already signed two packages, but worth only $108 billion. But do not worry: Americans have not said their last word yet. Republican and Democratic senators have reached a deal on a roughly $2 trillion stimulus package. Yes, you read it correctly. Two plaguy trillions! But if you think it’s a lot, you are wrong! In terms of the US GDP, two trillion is ‘merely’ 9.4 percent. So, don’t worry, there is room for further stimulus if needed.
Will that mammoth fiscal stimulus help? Well, it depends – the devil is in the details. A lot depends on what the governments will spend money on while dealing with this pandemic. The expenditures on healthcare and research on vaccine is desperately needed, so even fiscal hawks (like us) would not complain. But, it can’t turn out the F-35 way and also let’s say that funding infrastructure projects would not be too helpful right now. You see, this is a unique situation in which the whole economies freeze out in order to flatten the curve and prevent the healthcare system from collapsing. But when firms do not operate, they have no revenues. Without revenues, people do not have wages. Without wages and revenues, loans are not repaid. Without repayments, the banking system collapses – and the whole system goes down like a house of cards. So, some support is needed to prevent that – so that people could smoothly pay their obligations.
Whether the easy fiscal policy will be helpful or not – it remains to be seen. But the recent unprecedented fiscal stimulus will have one very important consequence. The fiscal deficits will soar. Forget about austerity, surpluses or even a balanced budget. So, public debts will necessarily follow suit.
Why is it important? Well, global debt levels were already sky-high. In Q3, the global debt, which comprises borrowings from households, governments, and companies, grew to $253 trillion, or to over 322 percent, the highest level on record. In many countries, public debt will soar to unstable levels.
Furthermore, this increases the odds that the US will go into stagflation, and this means that gold investment will quite likely be particularly attractive. It might be a good idea to consider learning more about this precious metal, before it becomes obvious to all investors – when it does, its price is likely to be already much higher.