The economic future is tinged with pink

EDITORIAL COMMENTS

The increase in infections and above all the risk of a second wave of the pandemic raise fears that the strong rebound of the economy in many countries is running out.

The economic future is tinged with pink

The economic future is tinged with pink

EDITORIAL BY ALFONSO TUOR

The economic future is tinged with pink

The message was clearly spelled out by the president of the American Federal Reserve, Jay Powell, who even spoke of a tragedy for the American economy. A similar speech comes from the European Central Bank which asked to be allowed to make permanent the policy of continuous liquidity injections, the famous quantitative easing, and to relax the rules that restrict the freedom of movement of the issuing institution.

Indeed, in the United States the data on the recovery and especially on the improvement in the labor market are becoming increasingly thin and have convinced the monetary authorities that the recovery will gradually lose strength without other measures to support growth. However, this new tax package is hostage to the tug-of-war between the Republican administration and the Democratic majority in the House of Representatives.

Even Donald Trump has announced the interruption of negotiations, extinguishing the hopes of an agreement and causing a decline in Wall Street which considered this measure indispensable to continue its upward race. However, it cannot be ruled out that this is a negotiating tactic and that the American president will soon change his opinion. The fact is that the recovery of the economies is different in both quality and extent in the different countries. And it is also clear that as long as a series of activities (from tourism to air transport) continue to be partially blocked by government measures and the fear of the coronavirus it will be impossible to return to the levels of economic activity of last year.

So the recovery continues, but at a slow pace and could even stop or even reverse due to a resurgence of the pandemic. Some are beginning to fear that in these conditions the continuous injections of liquidity by central banks will become lasting, as has been happening for some time in Japan. that public debt and especially private debt continue to grow and that the low cost of money and the abundance of money in circulation further increase public and especially private debt.

This is a plausible scenario. In fact, governments are ‘forced’ to launch new relaunch packages, while tax revenues are falling and social spending increases. In these operations they are comforted by the purchase by central banks of the securities with which they are financed.

For example, in the United States, the Federal Reserve already holds 20% of the federal debt which this year seems destined to exceed 120% of GDP. In Europe the figures are similar. In Japan, even the issuing institution already holds two-fifths of a public debt that is around 240% of GDP. As we have already written, this trend need not necessarily worry, as central banks will not call their governments and these bonds will in fact be irredeemable. The fact is, however, that the public debt of the five most industrialized countries is already higher today than at the end of the Second World War.

Much more worrying for the stability of the system is private debt. For example, in the United States, bonds were issued by high-risk companies for 330 billion dollars. This figure is higher than the historical record of 2012 which, however, concerns the entire year. This means that the enormous liquidity circulating in the financial markets and also the purchases of this kind of securities are allowing deceased companies to survive. The objective is to avoid at all costs any accidents that could jeopardize the confidence of the financial markets.

The result, however, is that even companies in bankruptcy are saved, destined to seriously weigh on a possible economic recovery. All of this indicates that the exceptional measures of governments and central banks cannot be changed. On the contrary, they must continue and most likely be strengthened in order not to fall into recession again. This is, moreover, what the American and European monetary authorities foretold, when they declared that monetary policy will not change until inflation returns to stable above 2%. So they won’t change for a long time yet.

Indeed, it seems legitimate to think that the holders of monetary policy are already beginning to study even more incisive interventions in the event that the rebound of recent months loses strength or even reverses. Some even go so far as to hypothesize that it will be possible to reach what is called helicopter money . This strategy, already mentioned by former Fed chairman Ben Bernanke, consists of distributing a one-time or repeatedly to all citizens . In short, the strength of the rebound in recent months is weakening and the future is not yet tinged with pink.

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