Stimulusannouncementandrelookathistory

US president-elect Joe Biden will unveil the stimulus plan today. The exact contours of the plan are not known but, in a speech, last week Biden had promised that it could be trillions of Dollars of relief which will provide monthly cheques to the American families, support to local governments for the virus relief and mass vaccination programs. He has promised that he will go for the bipartisan approval of the relief bill which however looks unlikely given the long-standing disagreement between the two parties on the relief quantum. On the other end of political debate, impeachment proceedings carry on against the current President, the only significance of the outcome will be on whether he remains eligible to run for 2024 elections. Markets in their combined wisdom are hardly concerned with that.

Coming back to the stimulus discussion. Let’s try to gauge the impact in simple terms. More stimulus means more bond issuance which will impact bond prices negatively. The Dollar Index should also take a bearish turn given the fiat currency loses its sheen. On the equity side, more free money firstly supports the equity prices but as the yields keep rising, the rising yields start impacting the long end of the equity valuation curve. So, it is like a parabolic kind of relationship here. The asset classes like gold and bitcoin any way would revel in the ensuing money creation.

As we have noted multiple times that the ideological edifice on which the government spending during the recessionary times rests on the Keynisian thought process which first came in light during the times of the Great Depression. Keynes seminal work The General Theory of employment, interest and Money came out in 1935. His idea was that as a recession spreads people tend to save more and spend less, which gives rise to a vicious cycle of low demand and lesser production and then job losses. He proposed that during such times govts need to run budget deficits and generate demand. This dictum was wholeheartedly supported by the politicians of that time. One would do well to remember that Herbert Hoover was the president of the US at that time and belonged to the Republican party. He considered a profligate government an anathema, his presidential years 1928-32 coincided with the worst of the depression years and his approach of maintaining the budget discipline was later considered as one of the central reasons of the depression getting prolonged. He was followed by FDR who was the Democrat candidate and he opened the flood gates with his new deal program.

To sum up the note, the Keynes full argument was that the governments need to maintain a budget surplus during good times to prepare for the deficit during the bad times. We all are aware that this side of the logic hardly prevailed as higher taxes and lower government expenditure even during the boom times is a difficult pill to follow democratically.