The new coronavirus is tragically deadly not only for humans but also for the world economy. Central banks fired their bazookas, but monetary policy did nothing during pandemics with their supply disruptions and self -quarantine effectively freezing economic activity. Interestingly, even central banks seem to recognize their incompetence. As Jerome Powell said in his current press conference:
“We don’t have the tools to reach individuals and especially small businesses and other businesses and unemployed people … we think financial responses are critical.”
It didn’t take long to convince governments to intervene and increase their spending. For example, Spain announced a $ 220B stimulus package or almost 16 percent of its GDP. The UK has revealed even the greatest stimulus: an unprecedented $ 400 billion financial rescue package, which is almost 15 per cent of GDP, to “support jobs, income, and businesses”. Germany is still going strong: the country has allowed its state bank, KfW, to lend up to $ 610 billion, or nearly 16 percent of GDP, to companies to curb the effects of the coronavirus.
Trump has already signed two packages, but only cost $ 108 billion. But don’t worry: Americans haven’t said their last word yet. Republican and Democratic senators have reached an agreement on a nearly $ 2 trillion stimulus package. Yes, you read it right. Two terrible trillion! But if you think it’s a lot, you’re wrong! In terms of U.S. GDP, the two trillion is ‘only 9.4 per cent. So, don’t worry, there is room for more encouragement if needed.
Will too much fiscal stimulus help? That’s it, it depends – the devil is in the details. Many depend on how much government money is spent while dealing with this pandemic. The costs of healthcare and research about the vaccine are very high, so even financial scapegoats (like us) won’t complain. However, this will not be the way to the F-35 and let’s also say that funding infrastructure projects is not very helpful now. You see, it’s a unique situation where the entire economy has come out to smooth out the curve and prevent the health system from collapsing. But if companies don’t act, they don’t have profits. Without income, people have no wages. Without wages and income, debts cannot be paid. Without payment, the banking system collapses – and the whole system collapses like a house card. So, some support is needed to prevent that – so that people can smoothly pay their obligations.
Whether quick fiscal policy can help or not – it remains to be seen. But the recent unprecedented fiscal stimulus has a significant consequence. Fiscal deficits will rise. Forget about savings, surpluses or even a balanced budget. Therefore, public debts must be complied with.
Why is this important? Thus, the level of world debt is sky high. In Q3, global debt, which includes loans from households, government, and companies, rose to $ 253 trillion, or more than 322 percent, the highest level on record. In many countries, public debt goes to volatile levels.
In addition, the likelihood of the U.S. going into stagflation has increased, and this means that investing in gold is likely to be more attractive. It may be a good idea to think more about the precious metal, before it becomes clear to all investors – if it does, its price is likely to be much higher.