Stocks coming week: Negative interest rates and huge deficits are the new normal. What happens after?



[ad_1]

First, a little background: Over the past decade, the European Central Bank, the Bank of Japan, as well as central banks in Denmark, Switzerland and Sweden have experienced negative interest rates. In other words, banks are forced to pay their fleet excess liquidity to the central bank.

Once unthinkable, negative interest rates are now accepted practice, even though they have an irregular track record in achieving their stated political goals. In addition, negative interest rates have taken root, with only Sweden managing to wean its economy off stimulus and bring rates back to positive territory.

The pandemic has heightened the need for monetary stimulus and, with further rate cuts, negative rate central banks have responded by purchasing large numbers of bonds and other assets in order to support their economies. The US Federal Reserve and the Bank of England, which have long resisted negative interest rates, are now under enormous pressure to follow the course mapped out in Europe and Japan.

The Bank of England flirted with negation for some time. Policymakers on Thursday gave banks another six months to prepare for negative rates, while insisting that they should not be seen as inevitable. Ultimately, the biggest drop in output in centuries could push UK rates into negative territory, leaving the US Federal Reserve as the only major central bank not to take the plunge.

The pandemic is also stretching public spending around the world to its limits. The combined budget response stands at 12% of global GDP, up from 2% of global GDP after the 2008 financial crisis, according to Capital Economics. Stimulus spending helped push the U.S. deficit for fiscal 2020 to $ 3.1 trillion, and the country’s debt topped $ 21 trillion – the largest share of the economy since 1946, when she was coming out of World War II.

There are several reasons why most economists aren’t too concerned about deficits right now. The first is that government spending is needed to prevent economies from sinking deeper into recession. The second is that low interest rates mean it is cheaper for governments to borrow to finance stimulus measures.

Neil Shearing, group chief economist at Capital Economics, said deficits become a problem when they remain high, either through consistently high spending or a substantial drop in tax revenues. But the economy could recover relatively quickly once the pandemic is over. In the longer term, low interest rates will help prevent public debt from spiraling out of control.

Andrew Yang: How to pull American cities through the pandemic

“None of this is to say that some countries won’t need to go through a period of fiscal restraint once the pandemic has passed. But most governments, especially those whose central banks can support their bond markets, have the right to do so. time to assess the extent of the damage and determine an appropriate response, ”said Shearing.

But there are still risks. Huge stimulus measures triggered by governments have obscured some of the economic trauma caused by the pandemic, especially in Europe, where job support programs have kept businesses afloat and workers employed. There is a chance that when the health crisis subsides and aid is withdrawn, unemployment and bankruptcies increase dramatically.

“If there is very large-scale, long-term damage to the productive potential of the economy, it will affect your ability to increase tax revenue in the future and your ability to run big deficits now is clearly lower. the more permanent the damage, ”said David Miles, professor of financial economics at Imperial College Business School.

Faced with mass unemployment and corporate bankruptcies, most governments have put deficit issues aside for now. The same is true of concerns about monetary policy, suggesting that extremely low interest rates are here to stay for the foreseeable future.

“A world in which unemployment is significantly higher is probably a world in which inflationary pressures do not build up at all, and it is a world in which central banks will not rush to raise interest rates. ‘interest,’ said Miles, who was a member of the Bank of England’s monetary policy committee from 2009 to 2015.

One problem: Keeping interest rates low will limit the ability of central banks to respond to the next crisis, in the same way that the global financial crisis and the eurozone debt saga kept rates low before the crisis. pandemic. But central bankers must face the current crisis before considering a return to a more conventional policy.

“You’d cut your nose to annoy yourself if you thought, ‘Well let’s put the interest rates at 3% so that when things get worse in the future we can bring them down to zero,’ ‘Miles said. .

“You get into the next problem, if such a thing happens, with limited ammunition on the monetary policy side, but that doesn’t mean there is an easy answer,” he added.

The man who could shake up the concert economy

Marty Walsh may not seem like the person to overhaul the odd job economy. He’s spent years championing construction workers and less time on the intricacies of on-demand work at billion-dollar tech companies.

But now Walsh, a former union leader and outgoing mayor of Boston, is set to become the next US Secretary of Labor at a pivotal time for industry and the economy in general, reports my colleague Sara Ashley O’Brien.

Millions of Americans have lost their jobs as the health crisis created an economic crisis. And many have turned to companies like Uber, Instacart, and DoorDash for their livelihoods.

At the same time, these companies are pushing to defend a controversial business model, in which they treat their workers as independent contractors rather than employees who would be entitled to traditional benefits and protections such as workers’ compensation, unemployment insurance, family leave, sick leave or the right to organize.

“Right now we’re at a crossroads,” said Shannon Liss-Riordan, a Boston-based labor lawyer who has been challenging Uber and Lyft over the classification of workers through various lawsuits for the past seven years. . “If he rises to the challenge, Marty Walsh may have one of the biggest impacts on the workforce in this country since Frances Perkins,” she said, referring to Franklin D labor secretary. Roosevelt, who was the chief architect of the New Deal.

following

On Monday: SoftBank (SFTBF), Hasbro (AT) earnings
Tuesday: DuPont, Cisco (CSCO), Twitter (TWTR), Nissan, Honda (HMC), Total earnings
Wednesday: General Motors (GM), Coke (KO), Uber (UBER), Toyota (TM), Maersk, Equinor Profits; American inflation
Thursday: AstraZeneca (AZN), Kraft Heinz (KHC), PepsiCo (DYNAMISM), The profits of Commerzbank; Update of Royal Dutch Shell’s strategy; Unemployment claims in the United States; Market holidays in China, Japan, South Korea

Friday: UK GDP; Market holidays in China, South Korea, Singapore

Correction: An earlier version of this story incorrectly stated America’s debt. It stands at $ 21 trillion.

[ad_2]

Source link