Gold and Financial Antivirus Stimulus Packages
Unfortunately, the new coronavirus is deadly not only for humans but also for the global economy. Central banks have fired their bazookas, but monetary policy is powerless during pandemics with its supply disruptions and self-quarantine effectively freezing economic activity. Interestingly, even central bankers seem to acknowledge their powerlessness. As Jerome Powell said during his recent press conference:
“We don’t have the tools to reach people and in particular small businesses and other businesses and people who may be out of work … we think tax responses are critical.”
It didn’t take long to persuade governments to step in and increase their spending. For example, Spain announced a stimulus package of $ 220 billion or almost 16 percent of its GDP. The UK unveiled an even bigger stimulus: an unprecedented $ 400 billion financial rescue package, amounting to nearly 15 percent of GDP, to “support jobs, income and business.” Germany went even further: The country authorized its state bank, KfW, to lend up to $ 610 billion, or nearly 16 percent of GDP, to companies to cushion the effects of the coronavirus.
Trump has already signed two packages, but for a value of just $ 108 billion. But don’t worry: Americans haven’t had their last word yet. Republican and Democratic senators have agreed on a stimulus package of approximately $ 2 trillion. Yes, you read it correctly. Two trillion pesticides! But if you think it is a lot, you are wrong! In terms of America’s GDP, two trillion is “just” 9.4 percent. So don’t worry, there is room for more encouragement if needed.
Will that gigantic fiscal stimulus help? Well, it depends, the devil is in the details. Much depends on what governments will spend the money on when dealing with this. pandemic. Healthcare spending and vaccine research are desperately needed, so even tax hawks (like us) wouldn’t complain. But, it may not turn out like the F-35 and let’s also say that financing infrastructure projects would not be too useful at the moment. You see, this is a unique situation where all economies freeze to flatten the curve and avoid the collapse of the healthcare system. But when companies do not operate, they have no income. Without income, people have no salary. Without wages and income, loans are not repaid. Without repayments, the banking system collapses and the entire system collapses like a house of cards. So some support is needed to avoid that, so that people can pay their obligations smoothly.
Whether easy tax policy will be helpful or not remains to be seen. But the recent unprecedented fiscal stimulus will have a very important consequence. Fiscal deficits will skyrocket. Forget austerity, surpluses, or even a balanced budget. So public debts will necessarily follow suit.
Because it is important? Well, global debt levels were already through the roof. In the third quarter, global debt, which included loans from homes, governments and businesses, grew to $ 253 trillion, or more than 322 percent, the highest level on record. In many countries, public debt will skyrocket to unstable levels.
Also, this increases the chances that the US will go into stagflation, and this means that investing in gold will likely be particularly attractive. It might be a good idea to consider learning more about this precious metal, before it is obvious to all investors; when it does, its price is likely to be much higher already.