Oildeal,FedlineandECO101

There are some terms which have been used so often in the current crisis that they have started to lose both the meaning and the impact. One such word is “Bazooka” which entered into the financial lexicon during the GFC when the US Treasury Secretary at that point Hank Paulson articulated his policy of big bail out in terms of having a “Bazooka” rather than a tame “squirt gun”. His point was that having a bazooka is preferable even if you don’t end up firing it.

When the response to the current meltdown started, Fed started with cutting the rates to near zero and started a massive asset purchase program. Intention was to support the credit markets and keep the liquidity flowing. The act was likened to firing the “big gun”. On Thursday last week, Fed announced a further USD 2.3 trillion worth credit purchase program and intention to expand the balance sheet without any limits. It is interesting to note that Paulson’s bazooka during GFC pales and looks like a squirt gun when compared to the policy responses today. It is all relative, ultimately.

Now lets address the more important question i.e. how much the balance sheet of a central bank can be expanded. The Economics 101 course tells us that the answer lies in the fundamental equation of money supply in the economy which is MV = PY. Where M is the money base or the amount of money available in the economy. V is the velocity of money essentially how many time a note changes hands in the economic transactions. P is the average price of goods and services and Y is the out put of the economy. In short term the factor V and Y would be considered structured and un malleable. So the pump priming of M would directly impact P and hence any balance sheet expansion should be inflationary. But a word of caution here, during GFC also the B/S size of Fed increased four folds but there was no ensuing hyper inflation hence there is some chink in the Eco 101’s armour. We will take that up again in a later note.

In the important news for the day, the oil producing countries have agreed for a production cut to the tune of 10 mn barrels per day. As per a 2019 EIA report the total oil consumption in the world was around 100 million barrels per day. So the cut is historic in its enormity which is close to 10% of global demand. But given the whole world is working indoors the global oil demand has also fallen from the cliff. Some estimates peg it to 30 mn bpd on the higher side. Brent crude near term futures contract trades at 32.9$/bbl up 4.5% from the previous close.

Indian markets open after a long weekend today. Rupee opens at 76.35 whereas the 10 year trades at G Sec trades at 6.48 in the opening. Over the weekend some states have announced the continuation of lockdown given that the number of infected cases continue to rise. World Bank in its latest estimates expects Indian economy to grow by 1.5-4% in FY 2020-21. This would be the lowest number since the great economic reform took place in 1990’s.

In the virus news, mainland china sees a fresh wave of new cases attributed mostly to have originated from overseas travellers. Globally the number stood at 1.8 million with US at 5.5 million cases at the top.