Presidentialdebate,StimulushopesandDeficitfinancing

The open issues which we had noted yesterday remain more or less the same and hence any market movements can be explained in terms of those four issues only i.e. second stimulus, elections, new corona cases and Brexit talks.

On the stimulus side, market hopes regarding a deal before the US elections in November got a jolt with President Trump accusing Democrats of being unwilling to craft an acceptable compromise. This came just after the news that there was some real progress being made on the deal with House Speaker Pelosi’s staff reporting that discussions are going well and they are close to “putting pen to paper to write the legislation.” After having discussed the stimulus issue every day one would do well to ponder what the primary point of disagreement is between the two sides.

Democrats want a bigger, all-encompassing package, with the figure starting somewhere in the region of USD 3 trillion and now at USD 2.2 trillion. On the other hand, the Republican figure started around half a trillion and is now hovering at around USD 1 trillion. To see these numbers in perspective, the US GDP is around 20 trillion USD. A Democrat package (reduced one) is around 10% of GDP. As in the current times funding the same with tax increases or cutting other expenditures is not possible, and in that case, this number will directly add to US debt. Conservatives reckon that adding to fiscal deficit is like stealing from the future generation to pay the bills today, because ultimately debt needs to be repaid by someone. Author Stephanie Kelton in her book The Deficit Myth addresses this concern saying that this thinking is incorrect as the fiscal hawks are mistaking the roles of a currency issuer (US Sovereign) and currency users (practically everyone else). A currency issuer should never worry about the default risk as they can print their way out. She writes that while the US dollar stays at the helm of the currency pack of the world this party can go on and hence should be used to provide immediate relief to the US public.

Now other countries resorting to the printing press can encounter slightly different issues. One is of rising bond yields and the other is of inflation and especially inflation in imported goods. Therefore Kelton’s medicine is not a universal panacea and hence needs to be used judiciously. Historically we see the example post WWI Germany which resorted to non-stop printing of Deutschemarks to pay for its war reparations. In the process, it ended up igniting hyperinflation. Hence our readers would do well to frame a meta question here which is not about the stimulus but what can possibly dethrone the USD from its perch.

In other news, after some days of hiatus, the UK and EU are back to the negotiation table. Impact was visible on the pound sterling as it appreciated past the major resistance of 1.3080. The US will see the second and last presidential debate today and markets will keep a keen watch to update their winning estimates of the candidates.  The weekly jobless claims report will also come out today.

Domestically, the bond market enjoys ample liquidity conditions which are driving the yield lower. The 10 year benchmark bond opens at 5.9050. Rupee depreciates against the dollar to trade at 73.76.