USretailsales,ChineseGDPandHelicopterBen

It was an important 24 hours from the macro data point of view. In the US markets, the retail sales and jobless claims data numbers were released. While in India we saw the results of first auctions under the aegis of GSAP 1.0. Today we will see the release of China GDP numbers for Q1 FY2021. The expectations are that the growth can be somewhere in the range of 19%. The stellar number obviously gets impacted by the low base related to complete lockdown in Q1 2020. The US retail sales in the month of March showed a 9.8% mom increase and the initial jobless claim numbers showed a pandemic era low of 576k. The Dollar Index is currently trading at 91.70 and 10 year US yield at 1.58 after plunging to 1.53 level in yesterday’s trade. Dow Jones breached the mount of 34k and closed around life-time highs.

So, can anything be better than this? Consumers are spending more, lesser number of people are getting fired, the equity markets are in the stratosphere, the bond yields are down. Scratching the surface one would realize that one can trace this retail spending to two things. One is that lockdown is getting eased and the pent-up demand of the last so many months is finding its way to the shop counter, second one and the more important one is the stimulus cheques are hitting the people’s bank accounts. That money is getting spent. To fulfil this demand businesses have to produce, for that they need to hire and that is getting reflected in the lower jobless claims numbers. However, the US economy still has 6 million fewer jobs compared to pre pandemic levels. US Fed has previously stated that they would like to see all those jobs coming back before they rollback any of their easing measures.   

Now let’s provide a bit of context to these stimulus cheques and the consequent spending. Now a slowdown brought about by a pandemic can be termed as demand shock. The demand just evaporates, the people are out of jobs, they don’t want to spend and are more interested in saving for the rainy day. The second order effect is that businesses see the demand going down and cut production. The production cut results in job losses and demand spirals down even lower. The central banks through its monetary policy can lower the interest rate and ease credit conditions but can’t force people to consume. And till the time they consume the demand won’t come back.

In 1969 economist Milton Friedman suggested that this vicious trap can be broken with what he called “helicopter money”. Just drop money from helicopters, people will rush to collect those bills and then rush straight to the shop to spend it. The proclivity to hoard that money will be lesser compared to their hard-earned money. Their spending will break the loop and the economy can be restarted. Later in 2002, Ben Bernanke the future Fed chief used the same example to make his point about why such policies are necessary in crisis times. (How to fund it? Create more money.) Ben Bernanke later earned the sobriquet of Helicopter Ben!

Readers can rightly argue that this is just another form of Keynesian theory of government spending in times of distress. But there is a difference. Helicopter money drop is quick and direct, straight to the pocket of the consumer. As the US economy roars back to life one would do well to understand whether one can take generalized lessons from here. The US even after creating so much money, sees its bonds being subscribed by foreign central banks. Not everyone else is in such a sweet spot, for other countries the helicopter can crash once it throws too much money on the ground. Their bond yields will spike, and their currency will see a run. Higher yields will make further borrowing difficult and currency runs will make imports costlier. Hence the point to note is that the economic theories depend on the context of time and space where they are being applied. We will continue this argument in future notes.

In India yesterday post the GSAP 1.0 25k Cr INR first auction, the 10-year yields went up by close to 8 bps as RBI showed a higher cut off to 10-year paper than the market expectations. 10-year closed at 6.11 yesterday.