The Monetary Consequences of COVID-19
Yesterday, I outlined why central banks were unable to create inflation from 2008-2016, despite cutting interest rates over 650 times and printing over $12 trillion in new money.
As a brief review, the reason why none of these policies ignited inflation was because very little of this money made its way into the economy. Put another way, banks were not lending this money into the economy. Instead they were using it for financial speculation in stocks and other asset classes.
Policymakers’ response to the COVID-19 pandemic, however, has been a whole other ballgame.
First and foremost, central banks have been MUCH more aggressive with their money printing. As I mentioned, between 2008 and 2016, central banks printed $12 trillion.
More than HALF of this ($7 trillion) has come in the last six months. Throw in stimulus programs from governments and the number balloons over $15 TRILLION.
Put another way, it previously took policymakers EIGHT years to spend $12 trillion. They’ve already committed to spending MORE than this in less than SIX months.
Also, and this is key… between stimulus payments and central bank lending facilities directly to small businesses/Main Street, much of this money is actually going straight into the economy.
In the U.S., we’ve already seen one stimulus program of $3 trillion. The government is now in talks for a second stimulus program of $1 trillion. On top of this, the Fed has put over $1.6 TRILLION in actual real money into the U.S. economy in the form of credit facilities. Add that up are you’re talking about $5+ trillion in new money entering the economy this year.
The U.S. Dollar Is Falling for a Reason
Let’s put this into perspective. The U.S. economy is roughly $22 trillion in size. So, in the span of six months, policymakers are planning to funnel an amount of money equal to nearly 25% of U.S. GDP directly into the economy (right now the number is $4.6 trillion, but it will hit $5.6 trillion with the next Stimulus Bill).
THAT’s how you get inflation. And it’s the reason the $USD is dropping like a brick.
The $USD has lost 4% of its value thus far this year. However, that number is somewhat misleading since the $USD spiked during the March COVID-19 crisis. In reality, peak to trough, the $USD is down a whopping 12%.
What’s particularly important to note is that the $USD continues to plunge week after week. Aside from the occasional consolidation period, the trend is decidedly DOWN.
In this big picture, the greenback is rapidly approaching the bottom of the range that has determined price action for the last FIVE years. I believe we could very well see the $USD break below the 2018 lows sometime in the next 12 months.
COVID-19’s Effects on Fiscal and Monetary Policy
The reason is because the government and the Fed will HAVE to keep stimulating the economy.
Regardless of how serious the actual COVID-19 situation is (I’ve outlined my thoughts on this issue several times before on these pages), policymakers are acting as if it’s a permanent gamechanger.
My contacts in the conference industry tell me that all exhibitions and conferences they are planning will be virtual throughout the first half of 2021. This means no in-person meetings for at least another year.
Large corporations, including Google, Facebook, Zillow, Twitter, Microsoft, Square and Uber have told employees to plan on working from home through the end of the year, if not through mid-2021.
Schools and universities, ranging from Michigan State to the University of Kentucky, Oklahoma State, and the University of North Carolina, are moving to hybrid learning (a mix of in person and remote learning) or even going 100% remote for their 2020 Fall schedules.
Simply put, the world is acting as if COVID-19 is a semi-permanent, if not permanent, game changer for business. This means that unemployment and other economic issues will remain in play for much longer than most realize. Indeed, the Fed has already stated it believes that the recovery won’t be complete until the end of 2021 if not later.
Add it all up, and the government will have to continue providing stimulus, which in turn means printing more money and funneling it into the economy.
This could unleash a true inflationary storm.
I’ll outline which investments to focus on during in this environment tomorrow.
Editor, Money & Crisis