Debts, deficits and stimulus

foreign currencies

We have just witnessed the Japanification of world finance as central bank attempt to counteract measures to stop Covid-19. How will this all end?

Never before in human history has so much extra money been created by central banks and thrown at a deep recession. Never have governments pledged to borrow so much as they try to offset some of the damage done by policies designed to stop the spread of the pandemic.

Since March this year, the Federal Reserve Board has created an additional $3 trillion. The European Central Bank has chipped in an extra $ 2.3 trillion, the Bank of Japan $900bn and the Bank of England $380bn. These central banks have swollen their balance sheets by these amounts, creating cash and buying-up government bonds. Their aim has been to keep markets liquid, to allow easy financing of big budget deficits, and to drive interest rates low and keep them there. So far, they have succeeded.

The Fed has provided a huge monetary stimulus, lending direct to banks and companies – as well as acquiring government paper. M3 money growth is up by almost a fifth since March. UK and Euro-area money growth have both accelerated to around 10% over the same time period, whilst Japan has managed 7%.

The Japanese say they will keep ten-year government bonds at a zero rate, buying as much as it takes to do so. The Fed has said there is no upper limit to how many bonds it would buy, as it is determined to keep rates low and markets liquid. The Bank of England has expanded its total bond-buying to £745bn so far – and is widely expected to announce some more soon. The ECB has promised to buy €1.35 trillion of bonds by June 2021.

Governments have taken advantage of this central bank enthusiasm to keep their borrowing rates at – or near – zero to allow or to create by policy action much higher state deficits this year. The International Monetary Fund (IMF) has come forward with forecasts of what we might experience as a proportion of GDP in each country. It places Canada at the top at 19.9%, the US at 18.7%, and Brazil at 17%.

The UK is at the high end of the Europeans, at 16.4%, with Spain at 14%, Italy at 13% and France at 11%. Even Germany is at 8%, showing the EU has put on hold its 3% deficit ceiling for the crisis. China is estimated at 12% and India at 13%. These are huge figures and will mean a sharp rise in total state debt around the world. Whilst Japan will remain an outlier with state debt near 250% of GDP, there will be more countries with state debt higher than GDP. Italy is at 160%, France at 116%, Belgium at 114% on these figures.

View Full Article – published by Charles Stanley on 28th October 2020