Possible Ramifications - Economic Policy Response to Coronavirus Crisis

ETF Research & Analytics Team

ETF Research & Analytics | A function of the ETF corporate think tank.

In analyzing all available data breaking down the global economic policy response to coronavirus crisis we are contemplating an outcome scenario for the short, medium- and long-term possible ramifications. Note here that mechanisms and sources of funds pertaining to the Fiscal piece are yet to be rolled out, however this analysis is based on available information thus far and it might sound a little alarming to say the least.

The global stimulus package is to provide monetary, liquidity operations & funding and fiscal stimulus. It would seem that monetary and liquidity stimulus would provide a short term boost to SME and big corporations in terms of minimizing layoffs and the increased closure of small and medium enterprise in lieu of permanent small business terminal outage which would cause catastrophic economic and social disruption because of its prominence in being the backbone of its national economies across the board. Our main concern leans most toward the fiscal part where mainly the uncertainty of sources of funds remain.

On March 27 the U.S. Congress passed the largest recorded aid package amounting to $2.2 trillion. $500 billion as a fund to support hard-hit industries and the same amount for direct payments to millions of U.S. individuals. Outside of the U.S. the G20 is said to inject $5 trillion into the global economy for the same reasons.

In a trial to produce a balanced basket of stimulus products and in retrospect to the monetary stimulus policy, the Federal Reserve cut interest rates by a total of 150 basis points taking federal funds rate to 0-0.25%, along with $700 billion in quantitative easing (QE), or asset purchases. On March 23 the Fed opened the door to unlimited and open-ended QE, planned purchases of corporate, municipal government bonds. The U.S. dollar value is at risk under the current inputs in an unprecedented argument.

Even though the purchasing power of the US dollar since more than a century has been declining based on published inflation rates, the dollar has lost north of 90% of its value. How much longer will the dollar maintain its reserve-currency status at this rate and under these unprecedented global crisis circumstances? Injecting trillions of dollars into circulation would only create value in the short run, but nothing but hyperinflation and further loss of the dollar purchasing power unmitigated by trade and production in the long run. As a result, the world’s reserve currency will mostly escalate in losing value.

The question remains, contemplating the consequence of a global hyperinflation seem to be gloomy, however, there is yet to be a realistic looking forward model – if yet perceived – to concoct a new blueprint streamlining a definitive alternative to the old economic modeling era!