USStimulusfinalizedandreturnofriskappetite

As the country descends into a three week long lockdown to counter the virus threat and similar situations is in the making in many places around the world, it is an opportune time to look back and trace where the current issue started.

In our newsletter the virus discussion made an entry on January 23rd for the first time. This was the day when initial palpitations due to its outbreak in the Chinese province started appearing on the face of global finance. In our communique on that day, we invoked Donald Rumsfeld Uncertainty matrix to explain the virus phenomenon and placed the outbreak in the Unknown Unknown quadrant. As we now know that the placement was correct and prescient with virus having impacted the world with hitherto unknown lethality. The economic fallout of the current spate of lockdowns is yet to emerge and will get clear only once the economic engine gets back to full steam.

At the start of the outbreak no body would have guessed that responding to it would require substantial emergency rate cuts and huge stimulus programs. US senate just now has approved a 2.2 trillion dollar stimulus package as a relief measure. The unanimous decision would allow the US govt to send checks to more than 150 million households, give money to small businesses and unemployment insurance programs.

To put things in a perspective total US Debt is close to 23 Trillion USD and as the current stimulus spending will directly add to that number. In normal finance if anyone is trying to borrow more then the cost of borrowing for that entity should rise but we see that the US yields have been coming down. This can mean two things either the normal financial theories are inadequate or the case of US is special. The latter seems like a more plausible explanation. Other countries which will pile up debt to finance the stimulus packages might not have the luxury which US has of being the world’s reserve currency.

Staying on the discussion of fiscal discipline, any act of fiscal profligacy is an act of borrowing from the future to spend today. The debt will have to repaid in future by raising taxes at that point of time. The idea of keeping the deficit is that may be the money can be put to productive use today adding to the GDP growth. The current stimulus packages across the world is not about growth but for survival (of the current generation) which is as good a reason to borrow if not more.

In India too the contours of the fiscal support for the public are being finalized and the economic task force is working on the modalities. Indian rupee which opened at 75.95 is currently trading at 75.35. Indian equities are also up second day in succession. As most of the market participants are either locked out or working in the partial shutdown mode there can be accentuated moves because of low liquidity conditions hence ascribing too much reasoning for market jumps can be problematic.