USJoblessclaimsandBOE's300yearhistory

In recent days the main topic of discussion in these daily mailers has been the different approaches various central banks have employed to provide stimulus and relief measures for their economies. The argument around more money printing and providing relief has been debated threadbare. The idea of debt monetization is frowned upon in normal times and represents an anathema for the fiscal conservatives on the ground as it goes against the basic tenets of the free markets. But here is the catch, are these “normal” times?

Lets have a quick roundup on why the current times can’t exactly be called normal.

• US claims due to joblessness had a further 3.3 million claims on Thursday, taking the overall number close to 33 million jobless people. This number doesn’t include people who would have had their incomes reduced but have not been furloughed yet.
• Fed fund futures: For the first time ever, it is predicted that there is a high probability of the Fed embarking on a negative rate cycle. Although though the Fed chief has said that NIRP is not on the table, the markets right now are giving more weight to a “whatever it takes approach”. CME contracts on Fed Fund rates beyond Dec 2020 are now trading above 100 indicating market expectation that Fed will take the benchmark rate negative by that time. The overnight rate stands at 0%-0.25% currently.
• The natural extension of this movement will be a fall in yields and a fillip to stock markets.
• BOE in their policy decision yesterday decided to keep the policy and stimulus at the current levels. But the bank said in its assessment that it expects the economy to face the biggest slump in 300 years. A small fact for the history watchers here, Bank of England was formed in the year 1696 hence when it says that the current crisis is worse than anything since 1706, it probably covers most of its policy making period.

Now let’s come to the point on why debt monetization is not a normal policy. Economists tells us that it is inflationary. In ordinary times, the amount of goods and services trading in the economy are matched with the money supply prevalent at any point of time. That is why we are told in economics 101 that the money supply should grow by nominal GDP growth every year. Economics Professor Richard Werner writes in his book, Princes of the Yen, about the impact of using such policies in non-extreme times. He writes that the easy money policy of the BOJ coupled with buying the JGB’s in the primary market in the 1980’s led to a huge increase in prices in Japan, especially in the real estate market. Prices of all the goods and services (which could not be imported) sky rocketed as the money in the system became abundant. We all are acutely aware of the fate of the Japanese monetary experiment.

So we see a semblance of logic is emerging. In normal times, if you use extreme measures it will result in a problem. Is the converse also true i.e. in extreme times will using normal measures also result in problems? Maybe.

The Rupee has opened around 75.36 mark, the 10 year benchmark bond trades at 6.01. US 10 year yield trades at 0.64 while the 2 year yield trades at 0.14. Indian stock markets are in the green with a 1.5% jump up. We will see the US NFP report released today. In all probability it is not going to be a “normal” one.