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The Largest Economic Gamble In Recent History

Biden’s extraordinary stimulus is an extremely high-stakes punt, not just for America, but for the global economic recovery post-Covid.

As soon as the pandemic struck and shut half the world, everyone knew that the global economy would be in a doldrum for most of the next decade. However, fuelled by freedom and patriarchy, America has attempted to defy such pessimism. After massively beating expectations of the gloomy growth forecasts of last summer, President Biden is playing with fire by pouring rocket-fuel fiscal policy into the mix.

The $1.9trn stimulus package is becoming law and totals the USA’s pandemic spending at well over $3trn, or over 14% of pre-Covid GDP spent since December, placing it in the top 5 spenders in relation to GDP for Covid altogether. The fear-inspired post-financial crisis of 2007-9 seems to have taken its last breath, as America’s top economic policy-makers go crazy.

The most obvious and hoped-for outcome of this huge spending is a fast bounce-back in economic growth, which seemed unthinkable this time last year. At the start of the year, most Americans received a welcomed $600 cheque from the Department of the Treasury, which quickly led to retail sales growing by 7.4% on the previous year. As most are stuck at home unable to use restaurants, pubs, clubs and other entertainment, Americans have taken to the streets to spend their cash in the shops.

In the last year, there has been an approximate increase of $1.6trn in the total savings of all Americans. If that were not enough already, another $1,400 will be added to many Americans’ pockets as a result of the Stimulus Bill.

Quite unusually for a developed country, America has a huge part of its cash being held by poorer households, who are dying to spend it all when the economy reopens. Should vaccines work in the way they claim to and if there are no new significant variants, unemployment is looking to fall back below 5% by the end of 2021.

Even in the EU bloc, where vaccine rollouts have been nothing more than plain pathetic, manufacturing surveys are looking just as healthy as that of the USA and UK, which have proven much better at current recovery speeds. Slowly but surely, the benefits will reach the whole world. America vacuums up imported products at a stupendous rate; the trade deficit is already over 50% greater than before the pandemic. However, the rest of the world cannot match this pace of fiscal spending.

The forecast from the OECD has suggested that the American economy could even grow to larger than it was predicted to pre-pandemic by 2022. From April to September, the USA is likely to outgrow all other economies’ recovery, even China, where there have been tighter restrictions on monetary policy and the Chinese stock market has taken a tumble of 9% in the last month.

No doubt, quickly surging out of this economic downturn that has pushed unemployment up to nearly 15% in America will be a trounce for the nation, opposing that of the financial crisis recovery. The list of benefits from this spending is almost endless: helping those who are unemployed, potential business investment funds, a reduction in childhood poverty, boosting spending, etc.

However, this is still a fine tightrope that Biden and all his economic policymakers walk along. They have just as much chance of coming out of this looking like anything but heroes. This is because America is running a very unpredictable economic experiment that no-one can predict the outcome of. There is no parallel to this experiment in post-war history, because of a more tolerant attitude towards potential rapid inflation and vast pent-up savings that could be spent or hoarded. The danger is visible for America and the world if the economy overheats.

This risky move has had many bond investors struggling to weigh up the potential growth of Government bonds over the next few years. Since last summer, the bonds have increased by 1% on the expectation of both higher inflation and interest rates. Any change in the confidence of investors will no doubt spill across borders. This can be seen in Australia, as the Central Bank has had to increase its bond purchases to prevent yields from rising too fast.

Additionally, the European Central Bank has been deciding whether or not to undertake similar precautions. Emerging markets across the globe with large deficits or dollar-denominated debts from lending, such as Brazil or Argentina, will be anxious about the tightening of monetary policy globally and the raising of interest rates on loans that could occur as a response to Biden’s economic policy.

Promises have been made by the Fed to keep the national interest rates low and try to keep demand for assets at a high enough level to boost growth until the downturn is relieved. Inflation can currently only go one way and it is likely to rise extremely fast as commodities and cryptocurrencies gain back their value and more, in comparison to early pandemic levels.

A new inflation target was made last year in the form of “average inflation targeting”, which will attempt to control inflation at a level above its 2% target to make up for previous shortfalls. Most of the last decade has seen an incredibly low inflation rate, so a surge is not necessarily as bad as it seems. However, with almost 1 in every 5 dollar bills ever printed being printed in 2020, inflation may rise too quickly to control.

Confidence in the Fed remains high, as the chairman Jerome Powell is adamant that any economic turmoil will be short-lived because long-term inflation dynamics do not “change on a dime”.

This is no dime, though. Almost $2trn of extra spending will puncture asset markets and possibly also create some conflict with a highly indebted Government. This is a big gamble, but a decision had to be made. America does not want to get caught in the trap of Europe and Japan where low-inflation, low-rate, low-growth have made their economies seem stuck. This may become a new normal and we see many more governments using large bailouts in times of recession, but the risks are huge for America.

A smaller Stimulus Bill would not solve all the problems and something different had to be done, as all other countries seem to have failed in avoiding a slump. Do not, however, underestimate the size of this risk taken on by the Democrats. This is a make-or-break moment for both the American and global economies.

This article was originally published on the author’s own blog here.