Biden starts a risky financial game

Every Ukrainian politician, businessman, economist, political scientist should read this editorial by the leading British economic magazine.

An attempt is made to assess the consequences of the unrestrained emission of the American dollar for the whole world.

Obviously, a noticeable depreciation of the dollar will begin soon, and dollar inflation will arise. Ukraine, which imports most of industrial goods and a significant part of foodstuffs, will have to start importing world inflation.

Ukrainian businesses and Ukrainian citizens with dollar savings will have to finance their share of the US government deficit.

Well, is it worth having such dollar savings and how to save your assets in the face of the rising wave of world inflation is a special topic.

The Economist (UK): Joe Biden’s Incentive Package Is a Big Game for America and the World
What will the world be like after the pandemic?
This is part of a three-step economic experiment.
14.03.2021

Reactionary article

When the coronavirus pandemic began, there were natural fears that the global economy would be depressed for many years. However, the reality turned out to be even worse than the gloomy predictions of last summer. And today fiscal rocket fuel is added to this combustible mixture of economic policy. The $ 1.9 Trillion Stimulus Bill, which President Joe Biden signed into law as this issue of The Economist headed to print, brings the total pandemic-fueled support close to three trillion (14% of pre-crisis GDP) since last December. … In total, about $ 6 trillion has been allocated to support the US economy since the beginning of the crisis. In accordance with existing plans, the Federal Reserve (as the central bank of the country is called in the United States, ed.) And the Treasury Department are also going to inject about $ 2.5 trillion into the banking system this year, while the interest rate will remain close to zero. In the decade following the 2007-2009 global crisis, influential American policymakers who set the direction of the economy have been overly modest. But today they are dropping all restrictions.

The likely result will be a rebound that seemed incredible in the spring of 2020. In January, retail sales were already 7.4% higher than a year earlier, as most Americans received checks for $ 600 from the government as part of the previous round of stimulus. Because Americans were forced to stay at home and were unable to spend as much money as they used to do in restaurants, bars and cinemas, the additional savings in the country during the past year amounted to $ 1.6 trillion in the country.

Under Mr. Biden’s program, most Americans will receive an additional $ 1,400 each. Unusual for this rich country is that a significant portion of this cash ended up in the hands of poor people, and they are likely to spend it once the economy is fully open. If vaccination continues, and America avoids an unpleasant encounter with a new variant of this virus, then the unemployment rate should fall below 5% by the end of this year, which is quite a comfortable figure.

The good news isn’t just limited to America. Even in the eurozone, there are good data on industrial production, although the EU lags behind in the field of vaccinations and the fight against new types of coronavirus, and therefore there are fewer incentives. Biden’s financial assistance will further support global demand for goods. America’s trade deficit is already more than 50% higher than pre-pandemic levels as the country’s economy sucks in imports. However, the rest of the world will not be able to catch up with Uncle Sam, who has gained dizzying speed. On March 9, the Organization for Economic Co-operation and Development (OECD), the club of rich nations, released its forecast that the US economy – the only one among the major economies – by the end of 2022 will be larger than predicted before the coronavirus epidemic. Between April and September, America is likely to outpace even China, which is currently tightening its monetary policy. In addition, its stock market has declined 9% since mid-February.

A swift recovery from the crisis, in the most difficult period of which the number of jobs fell by 15%, will be a triumph for America, while after the financial crisis the economic recovery in the country has been rather weak. The money provided by Mr. Biden will bring relief to those hard hit by the crisis — 9.5 million jobs have yet to be recovered in America. By providing adults with additional cash, widespread and persistent child poverty in the country will be significantly reduced.

While today’s powerful politicians have secured a place in American economic history, they are nonetheless unlikely to be considered heroes. The reason is that America is in the midst of a three-part economic experiment. Its ingredients are a unique amount of fiscal stimulus, a more tolerant attitude in the Federal Reserve to temporary surges in inflation, and a huge amount of unspent savings, although no one can say if consumers will continue to accumulate them or choose to spend them. This experiment is unmatched since the Second World War. The danger to America and the world is that its economy is overheating.

This risk is taken into account by investors. US 10-year bond yields, which are moving in the opposite direction from prices, have risen by about one percentage point since last summer, driven by expectations of higher inflation and higher interest rates. Because America has a key role in the global financial system, the prospects for its monetary policy have an impact outside the country. Over the past few weeks, the Central Bank of Australia has been forced to increase its bond purchases to prevent yields from rising too much. As this issue of the magazine was sent to the printer, the European Central Bank (ECB) was looking into the possibility of a similar intervention.
Emerging markets with large deficits (such as Brazil) or large and dollar-denominated debt (such as Argentina) have reason to fear that a tightening of the global financial situation could occur after the turn in US monetary policy.

The Federal Reserve is firm in its insistence that it will keep interest rates low and continue to buy assets until the economy starts to feel significantly better. Inflation will inevitably rise as the fall in commodity prices at the onset of the coronavirus pandemic disproportionate to the previous year, but the Fed will ignore it. Under his new “average inflation targeting” regime, adopted last year, he will seek to push inflation above the target of 2% in order to compensate for his previous miscalculations. This is a particularly desirable step, since for most of the previous decade, the problem for the world economy was inflation that was too low, not too high. But if the economy overheats at some point, then this, as stated by the head of the Federal Reserve Jerome Powell, will also be a temporary phenomenon. According to him, the more prolonged inflationary dynamics “will not change significantly.”

But can the Federal Reserve put trillions of dollars into circulation? We have no reason to doubt the Fed’s immediate plans, but neither the Fed itself nor the market can predict the final outcome of the American experiment. Perhaps the Fed will be forced to pour cold water on the economy and raise interest rates to keep inflation down. This would be an odd decision, given the recent emphasis on its responsibility to seek “broad and inclusive” power in the labor market. Higher rates will affect the asset market and may cause conflict with the government, which is constantly growing in debt.

All the chips are on red

Mr. Biden’s incentives are at stake in the big game. If all goes well, America will be able to avoid the terrible low inflation and low interest rate trap that Japan and Europe seem to have already fallen into. Other central banks may begin to copy the actions of the Federal Reserve. Large-scale financial stimulus may be the normal response to a recession. The risk, however, is that America is left with soaring debt, inflationary problems, and its central bank reputation put to the test.

Economist experts would have preferred smaller incentives. Unfortunately, the difficult state of American politics does not allow fine-tuning of the political decision-making process, and the Democrats wanted to get everything they could. Mr. Biden’s risky game is better than inaction. But no one should doubt the value of his bet in this game.

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