Financial Antivirus Stimulus Packages and Gold

The new coronavirus is unfortunately deadly not only to humans but also to the global economy. Central banks have fired their bazookas, but monetary policy is powerless during pandemics with supply disruptions and their self-quarantine effectively freezing economic activity. Interestingly, even central bankers seem to acknowledge their impotence. As Jerome Powell said during his last press conference:

“We do not have the means to reach individuals and especially small businesses and other businesses and people who may be out of work … we think fiscal responses are critical.”

It did not take long to convince governments to intervene and increase their spending. Spain, for example, announced a stimulus package of $ 220B or nearly 16 percent of its GDP. The UK unveiled an even bigger incentive: an unprecedented $ 400 billion bailout package, worth nearly 15 percent of GDP, to “support jobs, incomes and businesses”. Germany went even further: the country authorized its state-owned bank, KfW, to lend to companies up to $ 610 billion, or nearly 16 percent of GDP, to mitigate the effects of the coronavirus.

Trump has already signed two packages, but worth only $ 108 billion. But do not worry: Americans have not yet said their last word. Republican and Democratic senators have reached an agreement on a stimulus package of approximately $ 2 trillion. Yes, you read that correctly. Two trillion plagues! But if you think there are too many, you are wrong! In terms of US GDP, two trillion is ‘just’ 9.4 percent. So do not worry, there is room for further stimulation if needed.

Will that fiscal stimulus help mammoth? Well, it depends – the devil is in the details. Much depends on what governments will spend money on while dealing with this pandemic. Expenditures on health care and research on vaccines are very much needed, so even fiscal hawks (like us) would not complain. But, it can not come out in the F-35 mode and also let’s say that financing infrastructure projects would not be very useful now. You see, this is a unique situation in which all economies freeze in order to flatten the curve and prevent the collapse of the healthcare system. But when firms do not operate, they have no income. Without income, people have no wages. Without salaries and income, loans are not repaid. Without repayments, the banking system collapses – and the whole system collapses like a house of cards. So support is needed to prevent it – so that people can pay their debts smoothly.

Whether light fiscal policy will be beneficial or not remains to be seen. But the unprecedented fiscal stimulus recently will have a very important consequence. Fiscal deficits will increase. Forget austerity measures, surpluses or even a balanced budget. So public debt will inevitably follow suit.

Why is it important? Well, global debt levels were already very high. At Q3, global debt, which includes borrowing from households, governments and companies, rose to $ 253 trillion, or over 322 percent, the highest level recorded. In many countries, public debt will rise to volatile levels.

Moreover, it increases the chances of the United States entering stagflation, and this means that investing in gold is very likely to be particularly attractive. It might be a good idea to consider learning more about this precious metal before it becomes clear to all investors – when it does, its price is likely to be much higher already.