Dollarfall,StimulustalksandNiallFergusson

The major themes playing out in the global markets these days are stimulus or no stimulus, US presidential elections, spike in new corona cases and last but not the least is the unending saga of Brexit which approaches a new deadline every other day.

The US stock markets, which ended in red on Monday, recovered some ground by Tuesday’s close. The rise and fall of markets now closely follows the news on the stimulus which at one time looks likely and sometimes on the same day looks like a no deal. House Speaker Nancy Pelosi’s comments that she and the treasury Secretary were  closer to a deal gave markets a fillip whereas the comments by Republican senator Mitch McConnel that he was opposed to any deal just before the elections had a sobering effect. The size of the package has been the biggest source of disagreement where Republicans are looking for something in the range of a trillion USD and Democrats are vying for something north of 2.2 trillion dollars.

Now in normal times if you just increase the money supply in the economy by 2 trillion dollars without a corresponding increase in supply of goods and services , the price of the existing goods should rise (aka inflation). Also the Americans, armed with more dollars, will go and buy more foreign goods and services resulting in two things, firstly an increase in prices of those items (asset bubbles) and secondly a fall in the value of USD as an oversupply of the dollar looms. Later we might see the dollar index dropping on stimulus news.

Let us try to see stimulus dynamics in a historical context. Earlier, when the money was mostly in form of precious metals like gold or silver, any increase in money supply, even if the sovereign wanted to do it, was constrained by the availability of these metals. They can’t be digitally created like the fiat currencies of today. Hence the first instance of monetary stimulus in history is seen when the Spanish discovered unimagined amounts of silver in the South Americas. Tonnes of silver which was shipped to Spain in the 16^th century resulted in a huge increase in the money supply. Firstly, this made the Spanish Crown very rich but it afterwards resulted in very high inflation rates. Inflation until that time was an unknown phenomenon because prices of goods hardly ever changed. Historian Niall Fergusson describes this event in great detail in his book The Ascent of Money. He writes that once the initial burst of silver supply was over the world again reverted to a low inflation regime for the next two centuries. Inflation only came back when the concept of a completely untethered fiat money was discovered in the 20^th century.

In the global market round up, the dollar index is down hovering around 93. US treasury yields are up with the 10 year hitting 0.8% levels, its highest since June. Onshore the Yuan is trading at 6.66 which is its highest since July 2018. The euro and pound trade at 1.1840 and 1.2970 respectively. Gold trades at 1918$/oz.

On the domestic side bonds had a range bound day yesterday. The 5 year segment continued to outperform the longer end, this is even after the increased supply in the 3-5 year segment. The rupee continues to trade in a range between 73 and 73.50. The dollar decline globally will also support the rupee. India is also witnessing sustained dollar inflows off late. With the marquee deals in the FDI space apart, the FPI counter has also clocked inflows of close to 1.6 Bn USD in the month of October alone.