Today we will take a look at what coronavirus pandemic caused and how the government debt is increasing more and more. Also let’s take a look at the alternatives for your investment in the form of market news. Thanks to inflation and other factors, keeping your assets could not be a good idea.
Government debt in the world and inflation
While the further development of the coronavirus pandemic remains fraught with significant uncertainty, it is already clear that one of its macroeconomic consequences will be a sharp rise in government debt. At the same time, this will apply not only to fiscally responsible ones, such as Germany, which can afford it with a deficit of 60% of GDP, but also to Italy and others, for whom the debt burden significantly exceeds 100% of GDP.
Therefore, it is not surprising that unique voices are growing to ensure the sustainability of these debts. In the academic community, the possibility of extraordinary monetization of coronavirus debt is beginning to be seriously discussed. The central bank would cover additional state budget expenditures by printing new money. The difference compared to today’s QE is fundamental – the central bank would buy government debt directly (not through the secondary market) and, most importantly, would never require repayment.
The government debt is increasing
However, the monetization of government debt is certainly not without problems. It is generally considered an absolute taboo among economists. Direct financing of the state budget has historically resulted in several hyperinflationary episodes, such as the Weimar Republic or Zimbabwe. Proponents of monetization argue (led by economists such as Gaul or De Grauwe) that this time it would be an extraordinary/one-off reaction to a coronavirus pandemic.
Moreover, given the long-term undershooting of the inflation target and the coronavirus shock that further reduces inflationary pressures in the economy. They estimate that additional currency issuance would not cause dramatically high inflation that the central bank would not be able to cope with. The euro expects inflation at around 4-5% in 2020 over the next five years.
The euro crisis and debt monetization
Probably an even more problematic aspect is the legality of debt monetization – primary European Union law explicitly prohibits this operation, which is to guarantee the independence of the central bank. On the other hand, during the euro crisis and also in later years, it was the ECB that significantly bent its own rules to help the most indebted countries and to act as a lender of last resort.
Realistically, therefore, the path to some form of government debt monetization in the euro area appears to be extremely thorny, but this does not change the fact that the coronavirus pandemic brings a visible shift in thinking about economic policy options. After the monetary experiments following the global financial crisis in 2008 became the new standard, it seems that the trend of experimentation in the field of monetary policy will not just end there.
What about Markets?
Relatively pessimistic comments from the Fed’s management. Especially the number of new COVID cases in the US, reached almost 62,000 yesterday. They are beginning to enter the US dollar, and increase inflation of euro in position to the dollar. The Eurodollar thus jumped to a range of 1.14. It will now be interesting to see how the Eurodollar will fare. At least if the stock markets also take note of the deterioration of the epidemiological situation in the US. It shows that the right timing of the economy’s opening has failed. In this context, it will be useful to monitor the weekly statistics from the US labor market published this afternoon.
Oil continues relatively slow holiday sessions, dominated by minimal volatility and subdued trading activity. Yesterday, pulling Brent crude oil out of $43 dollars a barrel did not exceed the sharp increase in inventories in the United States of 5.7 million barrels. It was partially offset by a decline in stockpiles on the gasoline side (-4.8 million barrels). This week, there will be only one impressive number. Friday’s American producers’ activity. It could reverse the trend of the decline of active drilling rigs.
Yesterday, the US stock markets headed up with the last trading hours. Information technology (+ 1.4%) was the most successful in the individual market sectors. It was followed by utilities (+ 1.2%).
On the opposite side of the spectrum, with a decrease of 1.8%, were processors of raw materials. The Dow Jones Industrial Average ended with 26,067 points (+ 0.7%). The S&P 500 grew by 0.8% to 3,169 points. The technology Nasdaq Composite added 1.4%, rewriting history with a new record at 10,492 points.