PandemicresponseandMountPotosi

Minutes of the Fed meeting held on 29th April were released yesterday. Minutes give an indication of the committee’s concern regarding long lasting impacts of the pandemic, a possible second round of infection and the impact on low income households. Members said that “further clarity” on asset purchases might be needed “later this year”. Expectation of a further monetary and fiscal stimulus package have helped the risk on assets.

Now this is not the first time in history that a virus has changed the course of history in both a social and economic sense. Though everyone talks about the Spanish flu from 100 years ago we would like to talk about another event which owes its history to Spain. After the discovery of the new world in the 15th century by Columbus, many Spanish ships landed in South America. Historian and anthropologist Jared Diamond writes in his book Guns, Germs and Steel that the incoming fleets brought with them newly made guns but also something much more vicious which was the small pox virus. The native Inca population, which had no immunity against the virus unlike the Europeans, fell prey to the same in large numbers. Soon the Inca empire collapsed giving way to Spanish rule.

But the second part of story is more interesting. The new owners soon discovered a lot of silver in the area on a mountain called Mount Potosi and a mining boom started. For the next few decades thousands of tonnes of newly minted silver was shipped to Spain. As silver was accepted as in Europe this resulted in a huge unconstrained money supply in Spain, and elsewhere, resulting in something which medieval Europe had never experienced before, a term called inflation. The demand for fine goods rose and ultimately required the industrial revolution to satiate the appetite. We reckon that the sequence of events wouldn’t have been so neatly linear but this was just an attempt to show what the impact of a virus can do. An interesting aside is that the current dollar sign of $ also emerged (allegedly) from the Mt Potosi signature which was the letters PTSI juxtaposed one above the other.

The Dow Jones is up by 1.5%, the Dollar index is below 100 and emerging market currencies are showing signs of strength. US President Trump has upped his anti-China rhetoric on Twitter. How this thread pans out will decide the risk off trajectory apart from the virus news.

In other developments, the UK borrowed for the first time at the negative interest rate. In an auction on Wednesday, the UK debt management office sold 3.8 billion pounds of 3 year paper at minus 0.003%. In simpler language this can be described as a paid to borrow condition.

Indian bonds have been trading in a range. Yesterday the old 10 year paper traded between 6.02-6.05. Bond supply worth USD 4 billion is due on Friday. The Indian rupee has opened around 75.70. The Indian stock markets are also in green.

To wrap up the note today, in current times CBs don’t need to discover Mt Potosi to increase money supply , they can create it digitally. Is this difference important ?