How can the Fed launch an “unlimited” monetary stimulus with congress approving a $2 trillion package and the dollar index remain strong? The answer lies in the rising global dollar shortage, and should be a lesson for monetary alchemists around the world.
The $2 trillion stimulus package agreed by Congress is around 10% of GDP and, if we include the Fed borrowing facilities for working capital, it means $6 trillion in liquidity for consumers and firms over the next nine months.
Before analyzing the emergency plans that the global economy needs, we must remember that, as in the past, the prudence and responsibility of the civil society and businesses will help us to get out of this crisis.
In the face of an unprecedented crisis, we have to be realistic, responsible and cautious.
This is a supply shock added to a mandatory shutdown of the economy. As such, a serious response must be supply-side driven. It is ludicrous to try to stimulate demand with printed money and public spending in a forced lockdown where any extra demand will not drive supply up, even may drive it down.
In February, the general consensus between large investment banks and supranational entities was that there would be a one-time hit on GDP in the first quarter from the coronavirus impact, followed by a stronger, V-shaped recovery. IMF expected a modest correction of global GDP of 0.1%, and the largest cut on estimates for 2020 growth was 0.4%.
Many countries have decided to lock down entire cities and shutdown airspace to contain the spread of coronavirus. This decision may create a massive crisis drowned in liquidity.
Governments and central banks are committed to do whatever it takes in terms of demand-side policies, spending and increasing liquidity as much as needed to avoid a 2008-style crisis. However, these measures, which were already ineffective for years, will be even less successful this time.