With the coronavirus continuing to spread, economies are bracing themselves for what’s to come. This article looks at the support packages that have been offered to governments by their respective central banks and what repercussions this could have.

 

COVID 19 Central Banks

 

COVID-19 Government Spending

Economies are slowing down, and the economies are preparing for a small hibernation period. We should all be concerned about this, as this could lead to institutions crumbling and a reduced standard of living. Our governments are armed with huge cash injection promises from central banks to stimulate economies worldwide.

 

Modern Monetary Theory

To save the day, a new financial strategy has been introduced by central banks across the world, Modern Monetary Theory (MMT). MMT is significantly different from other traditional economic views and has been largely disregarded in credibility for many years (Econlib.org, January 2019).

The theory says that governments no longer need to worry about accumulating large amounts of debt with a central bank, and that money creation should be a useful tool to stimulate economies (Investopedia, September 2019). This means that governments printing their own currency can always fund themselves with that currency, and can print as much money as they like. As long as it covers the interest on government debt and keeps inflation low, it can print money as-and-when it deems necessary.

Critics of MMT argue that this could overheat an economy. Taxes would need to be increased and interest rates are more than likely to rise. All of this in the hope that this doesn’t automatically devalue the currency, lead to inflation or create economic chaos.

But now the world is in a state of crisis, and drastic actions have been taken. It would have been difficult to imagine this rolled out on such a big scale before. Here are some government support responses…

 

1. The UK Government and the Bank of England

The Chancellor of the Exchequer and the Bank of England have appeared to be devoted to rescuing companies and households from bankruptcy. Vast amounts of business support, welfare and spending promises have been made to prop up the UK economy during the pandemic.

Spending commitments include; a new Coronavirus Business Interruption Loan Scheme, extending statutory sick pay, business rates relief, and small business grant funding.

In addition to banking sector support, there will be over £20 billion available for SMEs, a reduction in interest rates, the introduction of an SME Term Funding Scheme, the release of the counter-cyclical capital buffer, and the ability to support banks to supply credit (GOV.uk, March 2020).

Overall, the Bank of England plans to inject £200 billion into the economy to help boost spending and investment and will support up to £190 billion of bank lending to businesses (13 times the net amount they lent to businesses in 2019). Interest rates have also been lowered to 0.1% (Bank of England, March 2020).

 

“It’s essential that we work together to help UK businesses manage through the potentially large but ultimately temporary disruption caused by COVID-19. Yesterday the Bank of England announced a comprehensive and timely package of measures to help do just that.” – Mark Carney (The Governor of the Bank of England, March 2020).

 

 

2. The US Government and the Federal Reserve Bank

Across the sea, the US government and the Federal Reserve have concocted an even more radical strategy. Unimaginably, Univeral Basic Income (UBI) is being rolled out for all US citizens, who will get up to $1,200 each and married couples getting up to $2,400, plus an additional $500 for each child.

The size of each payment package would diminish gradually for those whose income is above $75,000, while individuals earning more than $99,000 and couples earning more than $198,000 will not be getting any financial support.

This doesn’t include the large list of other stimuli that have been announced including; loans for small businesses, unemployment insurance, struggling industry support, hospital aid and state/local government aid.

This is truly unprecedented in scale and scope. The total costs coming up to a whopping $2.2 trillion, a tenth of the total of all US debt (federalreserve.gov, March 2020).

 

“We do have the ability to use our emergency lending authorities and we can continue to make loans and the point of all that is to support the flow of credit into the economy.” – Jerome Powell (The Federal Reserve chairman, March 2020).

 

 

3. The EU and the European Central Bank

Given the vast technicalities between the 27, it has taken the European Central Bank (ECB) a little longer to come to a financial solution.

President Christine Lagarde said the ECB would conduct longer-term refinancing operations (LTROs) to provide immediate liquidity support to the euro-area financial system (Ruptly, March 2020).

Different from the other central banks, the ECB kept its interest rates unchanged. Their financial support included promises of a so-called ‘Pandemic Emergency Purchase Programme’ to prop up EU countries, and €750 billion in government and corporate bond purchases to calm down sovereign debt markets. This is in addition to the €120 billion in bond-buying, as well as programs that will flood the eurozone with cheap credit (ecb.europa.eu, March 2020).

 

“Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.” – Christine Lagarde (European Central Bank president, March 2020).

 

 

 

Hyperinflation or Slaves to the System?

The reality is, without the introduction of MMT, and other massive cash injection promises, the world would be facing a serious economic downfall right now. It was never implemented as a viable economic option before this, so we just don’t know where this new path will lead us.

It could well lead to balancing economies, mitigating coronavirus market fallout, lead to employment highs and to thriving societies. But it could also lead to increased debt, increased inflation, increased interest rates, and a microwaved economy, that kept under pressure for too long, could explode at any time.

The coronavirus has already started creating traces of declining economic output and falling demand for trade, which will only lead to a vicious cycle that worsens sentiment for corporate investment and employment.

 

Read more in ‘IMF warns of new Great Depression here.

 

In 1945, the UK took out a loan of £2.8 billion to pay for WWII, reconstruction and importing food. After all the final payments and extra loans, the UK paid a total of £4.8 billion back to various countries, over £143.2 billion in today’s value. This was only just paid back in 2006, 61 years later!

 

Did you know: In 2020, the UK government pledged to spend over £390 billion to fight the coronavirus, nearly 3 times the UK WWII loan of 1945?

 

Going on the same trajectory path, this would mean that it would take over 180 years to pay back the debt. Not only that, but many countries around the world have signed themselves up for financial aid. It is clear that our children, our grandchildren, and many generations thereafter will be slaves to the system.

 

“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants, but debt is the money of slaves.” – Norm Franz

 

Conclusion

Hyperinflation commonly arises when the supply of goods and services remains roughly the same while the supply of the currency skyrockets (Inflationdata, November 2019). As money increases but the sum of goods and services available for purchase remains flat, the value of existing money declines. With effective policymaking, it’s less likely to feature but we never know where this new approach could lead us.

Physical gold and silver can be a valuable hedge against financial breakdown and currency collapse. To own your very own physical precious metals, call our friendly Bleyer team to discuss your options on 01769 618618 or email sales@bleyer.co.uk.

 

Read more in ‘3 Interesting Coronavirus and Precious Metal Investment Trends (Opinion Piece)’ here.

 

COVID 19 Spending Dragon