US President Joe Biden, to pull the US economy out of recession, triggered by repeated economic shutdowns and social distancing in 2020 aimed at tackling the Covid-19 pandemic, has promised to promote a giant fiscal support package to boost activity in the economy equal to 9% of US GDP.
The Weak overall demand in the U.S. and the planet in general
But such an effort would further boost the U.S. Federal Government’s debt and budget deficit in its federal budget, respectively. In addition, the dollar will weaken by making American products more competitive on global markets and within the US, while at the same time better addressing competition and trade war with China.
by Thanos S. Chonthrogiannis
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At the same time, it will be easier to repay the public dollar debts that Latin American, African, and Asian countries have respectively, further exacerbating global demand.
And here is the key point and real objective of this giant budget package. The recovery in weak overall demand in both the US and the rest of the world, with the aim of stirring up weak economic growth that will trigger a drastic increase in economic output to mobilise new investment plans to reduce unemployment.
Here it should be pointed out that the strength of the recession caused to the world economy by the response to the Covid-19 pandemic is tantamount to the damage that a world war would cause in both economic and social terms.
But a world war, if we deduct the cost of loss of human lives, creates disasters that, to restore normality in peacetime, necessarily trigger huge global demand, driving economic activity and causing gigantic sizes of economic growth.
In this case, these gigantic disasters do not exist to trigger overall demand in large quantities, both in the US and worldwide.
Weak overall demand is a phenomenon seen more generally in western economies since the 2008-2009 financial crisis. No matter how much effort has been made in the US, EU, and other Western economies, through continuous monetary policies to stimulate demand, they have failed to make it giant.
The fact that overall demand remains weak also forces the overall supply side to remain at low-corresponding levels, with the result that any investments are made for modernisation rather than expansion of the existing production process.
Production process where applied state-of-the-art technology also reduces the existing number of workers because the levels of optimal production require an increasing number of workers.
It is therefore this job insecurity that limits overall demand and forces workers to save more (if they do not serve debts greater than their incomes) than they spend. By extension, the potential product of the economy has remained permanently low for many years.
The problems and benefits expected from the financial support package
We therefore note that the lag in overall demand relative to its expected equilibrium from the continuous budgetary packages drawn up starting in 2020 also binds to restrictive levels the overall supply to the economy.
This is a profoundly serious problem, which can be seen from the finding that ever-increasing levels of deposits cannot find a way out and are heading for the financing of new projects which in turn will create new well-paid jobs.
The pandemic and its consequences have further highlighted this problem. Job insecurity for the future, the reduction of the labour force and the growth of the demographic problem due to the factors mentioned earlier reinforce this serious problem of lagging overall demand.
Against this economic framework, the US President’s giant fiscal package, which can be described as a “borrow and spend” fiscal policy aimed at creating a “high pressure economy” (this policy is a creation of Treasury Secretary Janet Yellen as head of the FED under President Bill Clinton), will most likely have the opposite of the desired results.
More specifically, it is highly likely that a very tight non-elastic labour market will be created and inflation will re-emerge. The problem that arises is that the fiscal package is not targeted at the low-income strata and only those affected by the pandemic and given that the middle- and higher-income strata have been less affected.
The point is that the fiscal package is evenly distributed with less money to poor families who do not have deposits. Overall, the budget package is greater than the damage done to incomes.
The re-emergence of inflation in the US
There is therefore a good chance that profoundly serious inflationary pressures will be created artificially in the American economy. The 10-year U.S. bond has begun showing it. In such a case, where we have inflationary pressures that will force the Fed to raise its interest rates the Pluses and minuses are:
- The zombie companies that have so far been funded by the brave fiscal support packages will go bankrupt.
- Companies that serve high borrowing at high wage costs will also be the first to go bankrupt.
- In both cases we will have a drastic rise in unemployment.
- The increase in liquidity will be directed either to repayment of existing debt or to placing it in stock market investments.
- It is becoming difficult to implement monetary policy.
- Increase in funds to be directed towards dollar deposits. But the problem is not the increase in the amount of deposits that already exists but the channeling of these into high-yield investment projects in the real economy that in western real economies these projects have a low return relative to the risk they encapsulate. But this does not apply to the Chinese real economy. We will most likely see capital flight to China.
- The U.S. Federal Government’s debt and private debt are inflationary. Given the deterioration-increase in private and public debt due to the pandemic That looks good.
- The aim of monetary policy is price stability and then everything else.
- Raising interestratestomaintainprices will immediately largely cancel out any actions of the new giantbudget
- Partial increase in total demand in the U.S. and worldwide.
We therefore recommend that investors move from dollar to harder exchange rate currencies.