Moremutations,morestimulusandMarshallPlan

As the new week starts, we should look at the important developments which have happened over last few days which we think will dominate the discourse in the markets. The first one is on the sober side as the virus tries to make a comeback in both the original form and the new and improved mutant version. Europe is under the strict lockdown conditions. In China’s Hebei province where number of new cases have been detected prompting the authorities to restrict the movement of close to 11 million people. In the US the White House Coronavirus Task Force sounded alarm that there is possibility of a US variant on par with UK version. Now what all this means, the ever-growing catalogue of the new variations will result in ambiguity about the efficacy of the ongoing vaccines and the hope that normalisation would soon follow the vaccination drives will be doubted. This results in more output losses as consumption will be hindered. The output losses and consequent earning decline then must be countered by government stimulus cheques.

Now that brings us to the second news. With all the commotion in the Capitol Hill and twitter bans behind it, the US administration is now priming up for guard change. Armed with majority in both houses, the president elect Biden said on Friday that he is assembling a multi trillion-Dollar relief package. The package he said will boost the stimulus cheques to $2000, extend unemployment insurance and aid the city and local governments in fighting the virus. “The price tag will be high but in order to keep the economy from collapsing and getting much worse we need to invest significant amount of money right now” Biden told the press. Now obviously the new stimulus will be funded by more borrowing. The US 10-year yield is at 1.11 and the Dollar index is trading at 90.44.

This seemingly endless ability to generate Dollars by the US is object of global envy but this is how it is. Readers would remember that we have discussed multiple times that this is how the world order came about. Raghuram Rajan in his 2019 book The Third Pillar writes that the seeds of such system were put in place by two events post WWII. First was Bretton Woods (which we have discussed at length) and the second was the formulation of the Marshall Plan for aid of Europe. In this substantial and generous plan, the US gave a grant to European countries equivalent of 2% percent of the recipient country’s GDP. Under the plan the countries imported capital goods, machinery as well as raw materials from US producers and the US government paid the exporters from the plan money. This over a period of time entrenched the US corporations and the US Dollar firmly and decisively in the global supply chain. The effect continued (and still continues) long after the Marshall Plan duration was over. We will come back to the exact mechanics of the plan and how it impacted the world order in our future notes.

Domestically the big news was the announcement by the RBI to restart the variable rate reverse repo auctions. The first auction will happen on the 15^th of January for INR 2 lac crore for a tenor of 14 days. For more than the operation itself the signalling which it provides is more important as it signals that the RBI is now moving towards the policy normalization and the days of ultra accommodative policy are over. Even if the measure is focused in rate anchoring in short term the 10-year benchmark yields went up by 3 bps in trade today.