Revenge spending drives EU out of Covid-19 slump
ECB, Fed disburse record volumes of cheap moneyIvan Mastagarkov
The pandemic is slowly cooling off with vaccine roll-out gaining pace in most industrial countries. Now the world is ready to retaliate to the virus with the most powerful weapon - money. And we are not simply talking money, we are talking all-time high cash volumes slated to be spent. The total volume of stimulus packages totals the unthinkable $29 trillion.
The main share of the earmarked spending will be supplied by the US Federal Reserve and the European Central Bank (ECB), the Bank of Japan, etc. With interest rates touching 0% - the message is more than clear - spend fast, faster, fastest.
At micro level, consumers are urged to borrow and spend immediately. It's hard to pick a better moment. Everybody was literally locked down for about a year. Practically overnight, restaurants and shops were shut down, transport and hospitality sectors were crippled. Nothing boosts the appetite for buying more than staying locked and slowly giving up to the doubts - Why is your flat one bedroom short?, Why did you have to buy a second hand car?, Why did you have to cancel all leisure trips? After a year of wearing pyjamas, its high time to buy huge volume of clothes to make up for the time lost. And so the spending beast is unleashed with only few analysts trying to argue that spending easily will call on inflation which will shortly thereafter become a major danger.
As of January 2021, Americans were sitting on roughly $1.7tn of excess savings accumulated during the pandemic. That is a lot of cash to play with.
But is inflation that dangerous? Actually, as one German analyst simply described the situation: Inflation is like toothpaste, if you use it moderately it would benefit your teeth, but if you squish too hard on the tube, it would be extremely difficult to push any unused paste back in.
Economists are saying we are in the roaring 20's, drawing a parallel to the 1920's. Covid-19 seems to be a catalyst for technological change, spurring digital adoption. Just like in the 1920's when the world saw the beginning of the tech revolution. Technological and scientific advances led to mass production of goods and the electrification of America, alongside booming stock markets and wealth. So far, so good, but the1920's ended with a devastating recession and a slump in stock markets. The point is whether the world has learned the lessons from the past.
Now - a century later - two months of sharply rising prices have raised concerns that record-high government financial aid and the Federal Reserve's ultra-low interest rate policies - when the economy is already surging - have elevated the risk of accelerating inflation. BofA estimates, for example, that the US government will spend $879m every hour in 2021.
In May, US consumer prices rose 5% from a year earlier, the largest such year-over-year jump since 2008. Many economists see the recent spike as temporary.
The Eurozone climbed over its 2% target in May, but the ECB seemed unmoved, with ECB President Christine Lagarde remarking that the huge stimulus packages will stay in place for some time. The EU and the US are desperately trying to use government stimulus programmes to avoid what happened in the 1930s, right after the Great Depression.
In the 1930s, when households struggled to recover from a downturn, birth rates fell and inequality fuelled populism. This is a possibility but is not considered the most likely. Figures quoted by Oxfam show that now the world's billionaires became $3.9tn richer between March and December 2020 even as economies shrank and millions of workers lost their jobs. Just like in the 1970s, but at a different scale. Then the major economies unleashed the oil prices which spurred the inflation pressure. That would mean that the major economies had learned the bitter lessons of the 1980s when robust economic growth was achieved on the back of private businesses of the Ronald Reagan era when competition meant everything. Now the industrial countries back a minimum global corporate tax rate of at least 15%. A $1.8tn American Families Plan is expected to lift more than five million children out of poverty. But birth rates are low. The US fertility rate fell and remained below 2.5 in the 1930s. Today, that rate is at record lows around 1.6, below the roughly 2.1 replacement level.
A lot of economists reckon that the EU and the US are more socialist than ever and so government support for businesses will continue. The world wants to avoid the experience of the 1980s when economies, including even the notorious for its low rates Switzerland, said it would end the policy of negative interest rates. BOJ signalled the same with the Fed forecasting end of cheap money sometime after 2023 and ECB also preparing for higher rates once the stimulus packages expire. We still have to wait and see if the main economies will sink in high inflation or the world has learned the lessons from the past.