Europullback,UShomesalesandStephanieKelton

After the fall on Monday the US stock markets recovered some ground yesterday with the Dow Jones gaining half a percent and the S&P inching up by one percent. The Dollar Index is trading at 94.15 which is its highest level since the end of July. Nowhere is the dollar strength more visible then when measured against the Euro which is trading at 1.1680. With the spate of new travel restrictions across European countries on the back of renewed covid cases, suddenly the Euro is losing its sheen. The British PM exhorted UK citizens to go back to working from home and said that the new restrictions could be in place for as long as the next six months.

On the data side, US home sales surged to their highest level in nearly 14 years for the month of August. Sales were hampered only by the lack of supply which resulted in rising prices. US President Donald Trump, addressing UN General Assembly yesterday, said that China must be held accountable for the covid pandemic. The open accusation prompted the Chinese side to issue a rebuke. As we have previously written that the issue of the pandemic being an emotive one is essentially intertwined with the upcoming elections.

Now let’s come back to the question which we had left in mid air yesterday about the response to the pandemic by any government. The query was how much a government can stimulate without going broke itself. In her book The Deficit Myth , economist Stephanie Kelton provides a unique way to look at this issue. In the context of the US, she writes that any sovereign government which prints its own money and borrows in its own currency can never go broke. She faults the prevailing economic theories which equate the federal government with a household. As per her book, the household budget needs to be a balanced one but the government budget need not. One is a currency user (household) and one is an issuer (government). Post 1971 when the umbilical cord of the currency to the gold standard was cut, it is an era of pure fiat money which can be printed by the sovereign on demand. The only limiting factor, according to Kelton, is inflation. Any unconstrained printing would result in inflation but, as per Kelton, even that has been proved wrong post the GFC as all the major economies are still undershooting their inflation targets even after printing money at will.

Maybe the theory regarding money supply and inflation needs to be revisited. Readers would remember this as a specific case of the Wittgenstein ruler which we invoked some weeks back. If you are not sure about the length of the ruler can you be sure that you can measure the table length correctly.

Domestically, the Indian rupee trades at 73.57 in line with the strong dollar globally. Indian 10 year benchmark bond trades at 5.99. The major event for bonds for the week would be 10k INR crore OMO auction due tomorrow and 30k Cr INR Gsec weekly sale on Friday. The October monetary policy is due on 1^st of October. The news from the northern border is comparatively calmer with both sides discussing resolution of the issues in a peaceful manner.