Financial antivirus and gold incentive packages

The new coronavirus, unfortunately, is deadly not only to humans but also to the world economy. Central banks have shot their bazookas, but during pandemics monetary policy is helpless due to supply disruptions and self-quarantine, which effectively freezes economic activity. Interestingly, even central banks recognize their impotence. As Jerome Powell said during his recent press conference:

“We don’t have the tools to attract individuals, especially small and other businesses, as well as people who may lose their jobs … we believe that financial measures are very important.”

It didn’t take long to persuade governments to intervene and increase their spending. For example, Spain has announced a stimulus package of $ 220 billion, or nearly 16 percent of GDP. The UK has provided an even greater incentive: an unprecedented $ 400 billion financial rescue package, accounting for almost 15 per cent of GDP, “to support jobs, income and business”. Germany has gone even further: the country has allowed its state-owned bank KfW to give companies about $ 610 billion, or nearly 16 percent of GDP, to mitigate the effects of the coronavirus.

Trump has already signed two packages, but worth only $ 108 billion. But don’t worry: Americans haven’t said their last word yet. Republican and Democratic senators have reached a deal on the stimulus package of about $ 2 trillion. Yes, you read that right. Two million trillion! But if you think that’s a lot, you’re wrong! In terms of U.S. GDP, two trillion is “just” 9.4 percent. So, don’t worry, if necessary there is room for further stimulation.

Will this instant financial incentive help? Well, it depends – the devil in the details. Much depends on what governments will spend money on fighting this pandemic. The cost of health care and vaccine research is much needed, so even financial hawks (like us) won’t complain. But that can’t become the F-35’s way, and let’s just say that funding for infrastructure projects wouldn’t be too useful now. You see, this is a unique situation where entire economies freeze to smooth the curve and prevent the health care system from moving. But if firms don’t work, they have no income. Without income, people have no wages. Without wages and income loans are not repaid. Without repayment, the banking system collapses – and the whole system collapses like a house of cards. Therefore, some support is needed to prevent this – so that people can pay smoothly on their obligations.

Whether a light budget policy will be useful or not remains to be seen. But the recent unprecedented financial stimulus will have one very important consequence. The budget deficit will increase. Forget about savings, surpluses or even a balanced budget. Therefore, public debt is bound to follow.

Why is this important? Well, the level of global debt was already sky-high. In the third quarter, global debt, which includes loans to households, governments and companies, rose to 253 trillion. US dollars, or up to more than 322 percent – the highest recorded level. In many countries, public debt will rise to volatile levels.

In addition, it increases the likelihood that the U.S. will go into stagflation, and that means investing in gold is likely to be particularly attractive. Perhaps it would be good to think about learning more about this precious metal before it becomes apparent to all investors – if it does, its price will probably be much higher already.