Stimulusdetails,bignumbersandMichaelLewis

Michael Lewis the celebrated author of Liar’s Poker came out with a book named Panic in 2008. This was the post GFC world and the book presented an anthology of articles written by financial journalists just prior and post the crashes which the world has witnessed in last 30 years starting from Black Monday of 1987. Lewis underlines the inherent inability of wise people to be aware about risks when the tide is going well. But that is not what we want to discuss today.

In a chapter on MBS, CDOs and their aftermath the book notes that as the numbers involved in the crisis go up, they seem to lose their relevance for the readers. The shock value goes down. You squirm reading a 100-bn Dollar swindle the same way you would react to a billion Dollar larceny.  The order of magnitude stops impacting you. Let’s try to see this in the context of relief packages which were announced to counter covid induced slowdown. Yesterday in the US President-elect Joe Biden unveiled the new stimulus plan of 1.9 Trillion USD which will ensure generous pay-outs to the public apart from a vaccine roll out. This will be on top of the 2.2 trillion USD given under the CARES Act last year and the 900-bn USD package passed in December. Just to give all these numbers a context. Indian GDP is 2 trillion USD, so a 2 trillion USD relief announcement in the Indian context would mean that the economic output generated by entire 125 billion people in a year can be replaced with a government grant. If the government is not earning this grant pay-out through taxes (or sale of its assets) this would add to its debt burden.

Our readers can rightfully question that why we keep harping on the debt burden in a zero-interest rate world and that too one which is issued in its own currency. That is as genuine a question which one can get. The answer though is philosophical and lies in the old age dictum that there are no free lunches in life even if some fancy terms like MMT etc. are thrown in as retort.

After the stimulus news, Dow Jones fell by 0.22%, the Dollar Index remains mostly unchanged at 90.28 and the US 10-year treasury yields hover at 1.12%. In another news, the US Fed Chief Jerome Powell said on Thursday that the US economy is still far from its inflation and employment goals hence it is too premature to even think about altering the monthly bond purchase program. There was suggestion last week that as the economy recovers post the vaccine rollout, Fed can look to trim its purchases. Simply put, a stimulus plan combined with Fed comments should be Dollar bearish and helpful for risk on assets including EM currencies.

Domestically we will see the RBI conducting the 14-day variable rate reverse repo auction for INR 2 trillion today. Short-term yields have gone up since this announcement was made a week back. On the flow side, FPI inflows continue in the new year and latest data shows inward of 13200 Cr INR in Indian assets so far.