Monday, May 4, 2020

The markets will continue falling unless the CoronaVirus is stopped

The shock to the global economy from COVID-19 has been both faster and more severe than the 2008 global financial crisis (GFC) and even the Great Depression. In those two previous episodes, stock markets collapsed by 50% or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10%, and GDP contracted at an annualized rate of 10% or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialized in three weeks.

Earlier this month, it took just 15 days for the US stock market to plummet into bear territory (a 20% decline from its peak) – the fastest such decline ever. Now, markets are down 35%, credit markets have seized up, and credit spreads (like those for junk bonds) have spiked to 2008 levels. Even mainstream financial firms such as Goldman Sachs, JP Morgan and Morgan Stanley expect US GDP to fall by an annualized rate of 6% in the first quarter, and by 24% to 30% in the second. US Treasury Secretary Steve Mnuchin has warned that the unemployment rate could skyrocket to above 20% (twice the peak level during the GFC).

In other words, every component of aggregate demand – consumption, capital spending, exports – is in unprecedented free fall. While most self-serving commentators have been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.

Not even during the Great Depression and World War II did the bulk of economic activity literally shut down, as it has in China, the United States, and Europe today. The best-case scenario would be a downturn that is more severe than the GFC (in terms of reduced cumulative global output) but shorter-lived, allowing for a return to positive growth by the fourth quarter of this year. In that case, markets would start to recover when the light at the end of the tunnel appears.

But the best-case scenario assumes several conditions. First, the US, Europe, and other heavily affected economies would need to roll out widespread COVID-19 testing, tracing, and treatment measures, enforced quarantines, and a full-scale lockdown of the type that China has implemented. And, because it could take 18 months for a vaccine to be developed and produced at scale, antivirals and other therapeutics will need to be deployed on a massive scale.

Second, monetary policymakers – who have already done in less than a month what took them three years to do after the GFC – must continue to throw the kitchen sink of unconventional measures at the crisis. That means zero or negative interest rates; enhanced forward guidance; quantitative easing; and credit easing (the purchase of private assets) to backstop banks, non-banks, money market funds, and even large corporations (commercial paper and corporate bond facilities). The US Federal Reserve has expanded its cross-border swap lines to address the massive dollar liquidity shortage in global markets, but we now need more facilities to encourage banks to lend to illiquid but still-solvent small and medium-size enterprises.

Third, governments need to deploy massive fiscal stimulus, including through “helicopter drops” of direct cash disbursements to households. Given the size of the economic shock, fiscal deficits in advanced economies will need to increase from 2-3% of GDP to around 10% or more. Only central governments have balance sheets large and strong enough to prevent the private sector’s collapse.1

But these deficit-financed interventions must be fully monetized. If they are financed through standard government debt, interest rates would rise sharply, and the recovery would be smothered in its cradle. Given the circumstances, interventions long proposed by leftists of the Modern Monetary Theory school, including helicopter drops, have become mainstream.2

Unfortunately for the best-case scenario, the public-health response in advanced economies has fallen far short of what is needed to contain the pandemic, and the fiscal-policy package currently being debated is neither large nor rapid enough to create the conditions for a timely recovery. As such, the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day.

Unless the pandemic is stopped, economies and markets around the world will continue their free fall. But even if the pandemic is more or less contained, overall growth still might not return by the end of 2020. After all, by then, another virus season is very likely to start with new mutations; therapeutic interventions that many are counting on may turn out to be less effective than hoped. So, economies will contract again and markets will crash again.

Moreover, the fiscal response could hit a wall if the monetization of massive deficits starts to produce high inflation, especially if a series of virus-related negative supply shocks reduces potential growth. And many countries simply cannot undertake such borrowing in their own currency. Who will bail out governments, corporations, banks, and households in emerging markets?

In any case, even if the pandemic and the economic fallout were brought under control, the global economy could still be subject to a number of “white swan” tail risks. With the US presidential election approaching, the COVID-19 crisis will give way to renewed conflicts between the West and at least four revisionist powers: China, Russia, Iran, and North Korea, all of which are already using asymmetric cyberwarfare to undermine the US from within. The inevitable cyber attacks on the US election process may lead to a contested final result, with charges of “rigging” and the possibility of outright violence and civil disorder.1

Similarly, as I have argued previously, markets are vastly underestimating the risk of a war between the US and Iran this year; the deterioration of Sino-American relations is accelerating as each side blames the other for the scale of the COVID-19 pandemic. The current crisis is likely to accelerate the ongoing balkanization and unraveling of the global economy in the months and years ahead.2

This trifecta of risks – uncontained pandemics, insufficient economic-policy arsenals, and geopolitical white swans – will be enough to tip the global economy into persistent depression and a runaway financial-market meltdown. After the 2008 crash, a forceful (though delayed) response pulled the global economy back from the abyss. We may not be so lucky this time.


via ProjectSyndicate

Tuesday, November 5, 2019

What could politicians do in the next financial crisis ?

A cloud of gloom hovered over the International Monetary Fund’s annual meeting this month. With the global economy experiencing a synchronised slowdown, any number of tail risks could bring on an outright recession. Among other things, investors and economic policymakers must worry about a renewed escalation in the Sino-American trade and technology war. A military conflict between the US and Iran would be felt globally. The same could be true of “hard” Brexit by the UK or a collision between the IMF and Argentina’s incoming Peronist government.

Still, some of these risks could become less likely over time. The US and China have reached a tentative agreement on a “phase one” partial trade deal, and the US has suspended tariffs that were due to come into effect on 15 October. If the negotiations continue, damaging tariffs on Chinese consumer goods scheduled for 15 December could also be postponed or suspended. The US has also so far refrained from responding directly to Iran’s alleged downing of a US drone and attack on Saudi oil facilities in recent months. The US president, Donald Trump, doubtless is aware that a spike in oil prices stemming from a military conflict would seriously damage his re-election prospects next November.

The UK and the EU have reached a tentative agreement for a “soft” Brexit, and the UK parliament has taken steps at least to prevent a no-deal departure from the EU. But the saga will continue, most likely with another extension of the Brexit deadline and a general election at some point. Finally, in Argentina, assuming that the new government and the IMF already recognise that they need each other, the threat of mutual assured destruction could lead to a compromise.

Meanwhile, financial markets have been reacting positively to the reduction of global tail risks and a further easing of monetary policy by major central banks, including the US Federal Reserve, the European Central Bank, and the People’s Bank of China. Yet it is still only a matter of time before some shock triggers a new recession, possibly followed by a financial crisis, owing to the large build-up of public and private debt globally.

What will policymakers do when that happens? One increasingly popular view is that they will find themselves low on ammunition. Budget deficits and public debts are already high around the world, and monetary policy is reaching its limits. Japan, the eurozone, and a few other smaller advanced economies already have negative policy rates, and are still conducting quantitative and credit easing. Even the Fed is cutting rates and implementing a backdoor QE programme, through its backstopping of repo (short-term borrowing) markets.

But it is naive to think that policymakers would simply allow a wave of “creative destruction” that liquidates every zombie firm, bank, and sovereign entity. They will be under intense political pressure to prevent a full-scale depression and the onset of deflation. If anything, then, another downturn will invite even more “crazy” and unconventional policies than what we’ve seen thus far.

In fact, views from across the ideological spectrum are converging on the notion that a semi-permanent monetisation of larger fiscal deficits will be unavoidable – and even desirable – in the next downturn. Left-wing proponents of so-called modern monetary theory argue that larger permanent fiscal deficits are sustainable when monetised during periods of economic slack, because there is no risk of runaway inflation.

Following this logic, in the UK, the Labour party has proposed a “People’s QE,” whereby the central bank would print money to finance direct fiscal transfers to households rather than to bankers and investors. Others, including mainstream economists such as Adair Turner, the former chairman of the UK Financial Services Authority, have called for “helicopter drops”: direct cash transfers to consumers through central-bank-financed fiscal deficits. Still others, such as former Fed vice-chair Stanley Fischer and his colleagues at BlackRock, have proposed a “standing emergency fiscal facility”, which would allow the central bank to finance large fiscal deficits in the event of a deep recession.

Despite differences in terminology, all of these proposals are variants of the same idea: large fiscal deficits monetised by central banks should be used to stimulate aggregate demand in the event of the next slump. To understand what this future might look like, we need only look to Japan, where the central bank is effectively financing the country’s large fiscal deficits and monetising its high debt-to-GDP ratio by maintaining a negative policy rate, conducing large-scale QE, and pursuing a 10-year government bond yield target of 0%.

Will such policies actually be effective in stopping and reversing the next slump? In the case of the 2008 financial crisis, which was triggered by a negative aggregate demand shock and a credit crunch on illiquid but solvent agents, massive monetary and fiscal stimulus and private-sector bailouts made sense. But what if the next recession is triggered by a permanent negative supply shock that produces stagflation (slower growth and rising inflation)? That, after all, is the risk posed by a decoupling of US-China trade, Brexit or persistent upward pressure on oil prices.

Fiscal and monetary loosening is not an appropriate response to a permanent supply shock. Policy easing in response to the oil shocks of the 1970s resulted in double-digit inflation and a sharp, risky increase in public debt. Moreover, if a downturn renders some corporations, banks, or sovereign entities insolvent – not just illiquid – it makes no sense to keep them alive. In these cases, a bail-in of creditors (debt restructuring and write-offs) is more appropriate than a “zombifying” bailout.

In short, a semi-permanent monetisation of fiscal deficits in the event of another downturn may or may not be the appropriate policy response. It all depends on the nature of the shock. But, because policymakers will be pressured to do something, “crazy” policy responses will become a foregone conclusion. The question is whether they will do more harm than good over the long term.

via TheGuardian

Wednesday, August 21, 2019

Dr Roubini praises India for potential new Cyrpto regulations

Finally a wise government who is banning these toxic shitcoins.

Good news for 1.4 bil Indians whose savings will not be suckered into 1000s of shitcoins that already lost 99% of their value from peak. Crypto is a massive driver of inequality: sleazy criminal whales getting rich at expense of retail suckers. 

Inequality in crypto worse than NK!


via twitter