Unfortunately, the new coronavirus is fatal not only to humans but also to the global economy. The central bank has already launched a rocket launcher, but monetary policy cannot do anything during the pandemic because their supply interruption and self-isolation have effectively frozen economic activity. Interestingly, even the central bank seems to admit its incompetence. As Jerome Powell said in a recent press conference:
“We don’t have the tools to reach individuals, especially small businesses, other businesses and people who may be unemployed… We do believe that fiscal responses are crucial.”
The government was soon persuaded to intervene and increase spending. For example, Spain announced a $220B economic stimulus plan, which accounts for almost 16% of its GDP. The United Kingdom has launched a larger stimulus package: an unprecedented $400 billion financial rescue program, accounting for almost 15% of GDP, to “support employment, income and business activities.” Germany goes further: Germany authorizes its KfW Bank to provide companies with loans of up to 610 billion U.S. dollars, or about 16% of GDP, to mitigate the impact of the coronavirus.
Trump has signed two packages, but the value is only $108 billion. But don’t worry: the Americans have yet to say their last words. Republican and Democratic senators have reached an agreement on a stimulus package of approximately $2 trillion. Yes, you read it right. Two plague trillions! But if you think a lot, you are wrong! In terms of US GDP, the two trillion is “only” 9.4%. So don’t worry, there is room for further stimulation if needed.
Will huge fiscal stimulus help? Well, it depends on the details. Much depends on the government spending some money in response to this epidemic. Expenditures on healthcare and vaccine research are urgently needed, so even fiscal hawks like us will not complain. However, it cannot prove the F-35’s approach, and it can also be said that funding for infrastructure projects is currently not very helpful. As you will see, this is a unique situation where the entire economy is frozen to flatten the curve and prevent the health care system from collapsing. But when the company is closed, they have no income. Without income, people have no wages. Without wages and income, the loan cannot be repaid. Without repayment, the banking system collapsed-the entire system collapsed like a house of cards. Therefore, some support is needed to prevent this from happening so that people can fulfill their obligations smoothly.
It remains to be seen whether loose fiscal policy will help. But the recent unprecedented fiscal stimulus will have a very important consequence. The fiscal deficit will soar. Forget about austerity, surplus or even a balanced budget. Therefore, public debt will inevitably follow.
Why is it so important? Well, the global debt level is already high. In the third quarter, global debt, including debt, household, government, and corporate debt, rose to $253 trillion, an increase of more than 322%, the highest level on record. In many countries, public debt will soar to unstable levels.
In addition, this increases the possibility of the United States falling into stagflation, which means that gold investment is likely to be particularly attractive. Before it becomes obvious to all investors, it may be a good idea to consider learning more about this precious metal-if it does, its price may already be much higher.