Written by: Gary Ashton
In response to US equity markets falling by 30% from their highs, this week US President Trump announced a significant fiscal package to coincide with the monetary stimulus coming from the Federal Reserve, who slashed interest rates by 1.5% in two emergency meetings. Initial reports indicated the President’s proposed measures would be in the range of $800 billion. Still, press reports allege Trump told US Treasury Secretary Steven Mnuchin, “if we are going to go big, then let’s go really big.”
In the end, the White House unveiled a $1.2 trillion package. Measures include $300 billion in small business loans, $200 billion in stabilization funds, $250 billion in cash payments directly to citizens in the next two weeks. The plan also includes $500 billion in a possible second round of handouts if required.
Economists are unsure if this stimulus, equivalent to approximately 4-5% of US GDP, will be enough to stave off an economic recession, which US Treasury Secretary Steven Mnuchin says is 90% certain. A lot depends on how long the Corona Virus lasts and how far-reaching it spreads. Looking at the 2008 great financial crisis, US GDP contracted four quarters in a row, the worst by 3.9%. Expectations are that this time could be worse.
Even before this latest round of fiscal loosening, the US government was falling deeper into the red. The chart below shows US debt as a percentage of GDP reached 100% in 2012 and has gradually crept up to 107% in 2019.
Trump will surely fund this new spending with additional government borrowing. The President is taking a “whatever it takes” approach to fighting this fast-moving economic crisis that could blow out US debt ratios to levels never seen before. Republican administrations have historically been fiscal hawks, shying away from significant spending proposals. The current crisis seems to have sent that playbook out the window.
Analysts expect extremely stressed financial markets to rebound sharply when the crisis is over. Economists, however, are also worried about what all this spending and monetary loosening will do to the inflation picture when the crisis ends, not to mention the increased debt load that will fall on future generations to service. Let us hope growth rebounds sufficiently to mitigate these problems.
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