Unfortunately, the new coronavirus is deadly not only to humans but also to the world economy. Central banks have fired their bazookas, but monetary policy has been helpless during pandemics with their supply disruptions and self-quarantine effectively freezing economic activity. Interestingly, even 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 especially small businesses and other businesses and people who may be out of work … we think the fiscal response is critical.”
It did not take long to persuade governments to intervene and increase spending. For example, Spain announced a stimulus package of $ 220 billion, or almost 16 percent of its GDP. The UK has unveiled an even greater incentive: an unprecedented $ 400 billion financial rescue package, amounting to almost 15 percent of GDP, to “support jobs, income and business”. Germany has gone even further: the country has allowed its state-owned bank KfW to allocate $ 610 billion, or nearly 16 percent of companies’ GDP, to mitigate the effects of the coronavirus.
Trump has already signed two packages, but only worth $ 108 billion. But don’t worry: Americans haven’t said their last word yet. Republican and Democratic senators struck a deal for a $ 2 trillion stimulus package. Yes, you read that correctly. Two grim trillions! But if you think it’s a lot, you’re wrong! In terms of US GDP, two trillion is “only” 9.4 percent. So, don’t worry, there is room for extra incentives if needed.
Will this mammoth fiscal stimulus help? Well, it depends – the devil is in the details. Much depends on what governments spend on dealing with this pandemic. The cost of health care and vaccine research is so necessary that even fiscal hawks (like us) would not complain. But this cannot be the case with the F-35, nor can it be said that financing infrastructure projects would not be very useful at the moment. You see, this is a unique situation where entire economies are freezing to smooth the curve and prevent the health system from collapsing. But when companies don’t work, they have no revenue. Without income, people have no salaries. Without salaries and income, loans are not repaid. Without repayment, the banking system collapses – and the whole system collapses like a house of cards. So some support is needed to prevent this – so that people can pay their debts without any problems.
Whether a simple fiscal policy will be useful or not remains to be seen. But recently, the unprecedented fiscal stimulus will have a very important consequence. Fiscal deficits will jump. Forget about austerity, surplus or even a balanced budget. So public debt will definitely follow suit.
Why is it important? Well, global debt levels were already sky-high. In the third quarter, global debt, which includes loans from households, governments and companies, rose to $ 253 trillion, or more than 322 percent, the highest recorded level. In many countries, public debt will jump to volatile levels.
In addition, it increases the chances of the US entering stagflation, which means that investing in gold is likely to be particularly attractive. It may be a good idea to consider learning more about this precious metal before it becomes apparent to all investors – when it does, its price will probably be much higher.