Coronavirus economic relief: Are we getting value for the money thrown at the pandemic? - Andrew Sheng

‘The US fiscal deficit rose from 6.4 per cent of GDP in 2019 to 17.5 per cent in 2020. This is an increase of 11.1 percentage points in GDP fiscal support to defend a decline of 5.8 percentage points in GDP growth...

‘The Biden administration is betting that the largest US stimulus package since World War II will restore American competitiveness and heal the nation. But much of this is not funded by domestic savings, such as taxing the rich, but by borrowing on the US dollar. 

‘The rest of the world will not fund the dollar forever, certainly not at near-zero interest rates. And if interest rates rise, the fiscal costs would be substantially higher. So bet on the Fed doing more to keep rates low. The truth of US debt is that it is not debt, but the rest of the world’s equity. America is the world’s too-big-to-fail borrower. If Biden fails, we will lose.’

Read here (South China Morning Post, Mar 13, 2021)

The Covid bubble

‘When it comes to this year, growth may yet fall short of expectations. New strains of the coronavirus continue to emerge, raising concerns that existing vaccines may no longer be sufficient to end the pandemic. Repeated stop-go cycles undermine confidence, and political pressure to reopen the economy before the virus is contained will continue to build. Many small- and medium-size enterprises are still at risk of going bust, and far too many people are facing the prospects of long-term unemployment. The list of pathologies afflicting the economy is long and includes rising inequality, deleveraging by debt-burdened firms and workers, and political and geopolitical risks.

‘Asset markets remain frothy – if not outright bubbly – because they are being fed by super-accommodative monetary policies. But today’s price/earnings ratios are as high they were in the bubbles preceding the busts of 1929 and 2000. Between ever-rising leverage and the potential for bubbles in special-purpose acquisition companies, tech stocks, and cryptocurrencies, today’s market mania offers plenty of cause for concern.’

Read here (Project Syndicate, Mar 2, 2021)

Nonstimulus arithmetic: Why the American Rescue Plan has to be big -- Krugman

‘We are not in a conventional recession — a decline in output due to insufficient aggregate demand. What we’re suffering from, instead, is a partial lockdown, the result of both public policy and private choices, that has sharply curtailed high-infection-risk activities, like indoor dining.

‘Pumping up overall spending with fiscal and monetary policy wouldn’t send diners back into restaurants, nor should it. So we aren’t experiencing a normal output gap, something that should be closed by stimulus. It’s actually not clear whether we even want employment and GDP to be higher before vaccination gives us herd immunity.

‘What, then, is the role of policy? As some of us have been arguing all along, it’s not stimulus, it’s disaster relief: an attempt to shore up the living standards of those hurt by the temporary lockdown, as well as providing resources to deal with the pandemic itself. Or as I recently argued, you can think of what we’re doing as being something like fighting a war — special expenditure in the face of an emergency.’

Read here (paulkrugman.substack, Feb 10, 2021)

The Covid-19 pandemic is forcing a rethink in macroeconomics: It is not yet clear where it will lead

 ‘In the form it is known today, macroeconomics began in 1936 with the publication of John Maynard Keynes’s “The General Theory of Employment, Interest and Money”. Its subsequent history can be divided into three eras. The era of policy which was guided by Keynes’s ideas began in the 1940s. By the 1970s it had encountered problems that it could not solve and so, in the 1980s, the monetarist era, most commonly associated with the work of Milton Friedman, began. In the 1990s and 2000s economists combined insights from both approaches. But now, in the wreckage left behind by the coronavirus pandemic, a new era is beginning. What does it hold?...

‘The rethink of economics is an opportunity. There now exists a growing consensus that tight labour markets could give workers more bargaining power without the need for a big expansion of redistribution. A level-headed reassessment of public debt could lead to the green public investment necessary to fight climate change. And governments could unleash a new era of finance, involving more innovation, cheaper financial intermediation and, perhaps, a monetary policy that is not constrained by the presence of physical cash. What is clear is that the old economic paradigm is looking tired. One way or another, change is coming.’

Read here (The Economist, July 25, 2020)

How the coronavirus may deliver a shock to the US dollar: Stephen Roach

‘America is leading the charge into protectionism, deglobalisation and decoupling. Its share of world foreign-exchange reserves has fallen from a little over 70 per cent in 2000 to a little less than 60 per cent today. Its Covid-19 containment has been an abysmal failure. And its history of systemic racism and police violence has sparked a transformative wave of civil unrest.

‘Against this background, especially when compared with other major economies, it seems reasonable to conclude that hyperextended saving and current-account imbalances will finally have actionable consequences for the dollar and/or US interest rates.

‘To the extent that the inflation response lags, and the Federal Reserve maintains its extraordinarily accommodative monetary-policy stance, the bulk of the concession should occur through the currency rather than interest rates. Hence, I foresee a 35 per cent drop in the broad dollar index over the next two to three years.’

Read here (South China Morning Post, June 25, 2020)