Last week’s markets were predominantly driven by Fedspeak and Wall Street heavyweights turning massively bearish. Bank stocks were hit hard in particular, as they are front and centre of any economic development, one that is deemed to become worse than anticipated, particularly if according to Jay Powell fiscal measures are not to be stepped up. The Fed chair obviously indicated that monetary policy has delivered but cannot be the saviour of last resort without significant fiscal measures.
The sages from the ivory tower have a point, without a doubt. We have to understand that 36.5 million Americans have been registered without a job. Estimate that for every breadwinner in the country there are on average what, 2 dependents, and you are facing well in excess of 100 million citizens with little to no income, apart from the 1,200 dollars that are meant to come their way at some point. That’s a third of the total population, mind you.
Meanwhile, Donald Trump’s persistent calls for negative rates have thoroughly been pushed back on. Powell made it clear in his Wednesday address at the Peterson Institute last week that the Fed would not follow other central banks into negative rate territory. He appreciated that this would make additional fiscal measures more costly but certainly worth it if it helped avoid long-term economic damage and instigated a stronger recovery.
Well, Mister Powell, we all hear you, but this is probably easier said than done. According to the latest Monthly Treasury Statement the US federal budget produced a deficit of 737.8 billion dollars in April. Yes, you heard correctly… 3/4 of a trillion in deficit for one month! The latest annual budget deficit for the whole calendar year 2019 reached just over 1 trillion, and that was record territory in its own right. For the first 4 months in 2020, America’s deficit has already piled up 1.12 trillion bucks…
Its’ simply mind-boggling if you look at these numbers. To be sure, monthly data have proven to be volatile, but even the 12-month rolling charts reveal the radical nature of the divergence between the Treasury’s expenses and tax revenues. The true elephant in the China shop is likely not the coronavirus but the effect of the governments-induced closure of the global economy. The situation is hardly unprecedented, rather apocalyptic.
And there is one point that David Rosenberg has made that needs to be considered. The staggering amounts of money governments have already spent aren’t stimulus as we would normally use the word. They are more like immediate life support. They may be helping to contain the damage of the fall-out, but they aren’t going to bring the economy back as some of the investors have envisaged. That part hasn’t even started yet.
How on earth can Steven Mnuchin follow Powell’s advice and drive even further fiscal measures? Seasonality of monthly numbers or not, the annual deficit is destined to explode to a level of 3-4 trillion. We are literally talking kitchen sink here. And if policymakers miss a beat on bringing the economy back, then this kind of scenario will also haunt us going into 2021, particularly with a president who will then have been legitimised by elections, whoever that will be. MMT, here we come!
Remember that this space had jokingly predicted that America’s national debt will hit 25 trillion before Trump’s term ends. We have already surpassed the 25 mark, and a few more will inevitably be added before he or a new president will be inaugurated. The Treasury market is dubbed to be the deepest in the world, but even there is a limit how many trillions more it will be able to digest. The only solution, or shall we say option, for Washington will be to truly monetise and cancel debt via the Fed.
We should all be clear what this means. Monetary inflation will exceed every calculable threshold. The dollar will at one point have to be devalued, or it will depreciate by the natural function of monetary equilibrium. America’s economic leadership will evaporate under the weight of its financial excesses and the seemingly perennial twin deficit be presented with its silver lining. By extension, the status of the sole superpower is in stark jeopardy, if it hasn’t already been for a while.
One thing seems to be sure: Nothing will be the same after Corona. Almost by definition, other economic powers like China will be forced to step up and exert leadership qualities. A multi-lateral world going forward is a given, despite all the additional uncertainty this will bring to an already pretty uncertain world. The question is how America will take it, and how much of a bull in the proverbial China shop it will turn out to be. We all better buckle up, watch our assets, track the dollar more closely than ever, add to gold, and hope for the best.
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