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On March 10, the house of Representatives passed a $1.9 trillion new coronavirus epidemic aid bill, which President Biden is expected to sign on March 12. As expected, the vote was 220 votes against 211, which means Democrats, without Republican support at all, have forced a huge redistribution plan in the Congress under their control: another round of economic stimulus to local governments, businesses, and residents (85 per cent of households will meet cash support conditions).
Although there is no suspense about the adoption of the bill, it is necessary to remind readers here that this is actually the fifth fiscal stimulus after the US declared an emergency on March 13, 2020. In about a year, the United States launched a total of $5.8 trillion in financial support, which is about 28% of the nominal GDP of the United States, which is much more than 12% and 16% of Germany and Japan. The good news is that the OECD is optimistic to fix the global economic growth to 5.6% this year, which is still considered after China set the target of economic growth at more than 6%.
However, there is no free lunch in the world, and the optimism in the capital market before the plan is implemented in the United States is becoming weaker and the worry about side effects is becoming stronger.
Growing investors are worrying about inflationary pressures, which directly leads to a suspense that the Fed may start tightening ahead of time. So many investors interpret the rapid rise in long-term interest rates in the United States after the Spring Festival as the market’s response to inflation expectations. The expectation is that if there is no COVID-19, the actual GDP will increase to 19 trillion and 800 billion US dollars in 2021, so if the United States has a 6% growth rate, it will be able to lead Europe and Japan in a big way, and this year will fill the gap. At present, the US GDP has been restored to 97.6% of COVID-19 before, and the market is optimistic ahead of schedule. It is likely that the US will finish filling the pit in the middle of this year.
This has resulted in a huge psychological gap between the Fed, which is strongly concerned about employment and the environment in which SMEs live, and the Biden team. Powell and Ellen both expect this over expected stimulus to solve employment next year (Yellon expects to achieve the maximum employment by the end of 2022), which will stimulate enterprises to expand reproduction, and the income of residents will improve, and lead to a positive cycle of spontaneous expansion of consumption.
As the author has emphasized recently, the suspense of the above market participants is not entirely reasonable. To some extent, the author agrees with the Fed that the recent inflation rate in the United States may indeed have a strong rebound for technical reasons, but it is likely to be a short-term phenomenon. Before the real inflation challenge comes, the government and central bank lack motivation to turn to austerity.
The Fed, reflecting on Japan’s past 20 years, is more concerned about deflation taking root in the corporate and residential sectors than inflationary pressures, leading to what is called “Japanese.”. That’s enough to explain why from Powell to Yellon, and even Bernanke, have repeatedly stressed the need to address the employment problem in the United States as soon as possible – inadequate effective demand. More than 60% of US GDP comes from consumption. If the long-term optimism of enterprises is not stimulated to stimulate employment as soon as possible, the previous huge fiscal stimulus may turn into excess savings as Japan does because of residents’ worries about future life.
This is a sign that has emerged in the United States, Europe and Japan. As the Fed, once normalization leads to chronic shortage of internal demand, and long-term price downturn, especially the strong supply capacity of China exists outside. Then the central bank will be forced to face a longer-term low interest rate environment, and non-traditional monetary policy will become the normal. The Federal Reserve may lose a large part of market control measures, thus affecting its ability to control the economy.
For the central bank, inflation can be effectively suppressed through interest rate hikes, which is a short pain. From the Japanese experience, it is very difficult to deal with deflation expectations. Once drowned in the liquidity trap, it will squeeze the central bank’s capacity space. Since Bernanke, American researchers and decision-makers have almost determined that Abe economics has failed to work, mainly because the BoJ did not act decisively in the early days. Therefore, it is foreseeable that in the short term, the side effects of asset bubbles and inflation expectations will be minor in the mainstream of the United States until their disintegration induces new turbulence.
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