Given the unprecedented times we’re living in, we started a new service of sending once a week, a summary of 3-4 articles that reflect the new realities and their potential impact on our lives and assets. Below are summaries of four intriguing articles with some unique insights.

The Age of Magic Money: Can Endless Spending Prevent Economic Calamity? 

Sebastian Mallaby, Foreign Affairs
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Where the Global Financial Crisis (GFC) expanded the Fed’s toolkit with quantitative easing, the pandemic’s recessionary threat prompted even more aggressive action from the central bank as it moved beyond Wall Street to offer lines of credit to Main Street. The combination of these two crises have ushered in what could be called the age of magic money – “a new era of assertive and expansive government.”

The curious remission of inflation in the years since the GFC has allowed a “don’t tax, just spend” budgetary policy, increasing deficits to stimulate the economy. The strength of the U.S. dollar has compounded this power, though at a cost to developing nations. While these actions have naturally raised questions as to the sustainability of high debt levels, nominal growth levels indicate that the U.S. will be able to run a deficit while still modestly reducing the debt-to-GDP ratio over time. Durable low interest rates can reduce the cost of debt to such a point that the GDP boosts created from applying that debt offset the burden of taking it, thereby allowing a wide range of public investments. However, this potential application is dependent on the continued suppression of inflation rates to keep nominal GDP growth above debt repayments.

The twin crises of 2008 and 2020 have unleashed the spending powers of central banks, prompting the high-risk, high-reward age of magic money. As the coronavirus pandemic continues to shake the economy to its core, the Fed has stepped up to the plate with the game on the line. With such a high degree of uncertainty, only time will tell if the new era of spending is a home run or a strikeout.

Stung by Past Mistakes, Eurozone Takes a Page From U.S. to Fight Crisis 

Tom Fairless, Wall Street Journal
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Though the European Union’s (EU) response to the Covid-19 crisis has been slow, they are rapidly closing the gap with the US in its emergency response. The Federal Reserve and US Treasury came right out the gate in March with trillions of dollars in support of the US economy. It’s now June and the European Central Bank (ECB) has yet to officially approve a stimulus package. 

Last week, the EU unveiled proposals for a €750 billion spending package. The ECB is expected to announce an additional €500 billion in additional bond purchases. Germany is also planning to unveil a national €100 billion fiscal stimulus program this week. Other European countries may follow suit. So far, Eurozone government spending and loan guarantees will provide about €1.5 trillion in stimulus, amounting to 13% of the region’s GDP. The spending is similar to the stimulus in the US and would likely make up for a eurozone GDP contraction of about 12%. In the first quarter on an annual basis, the eurozone economy shrank by 14.4% while the US economy only contracted 4.8%. 

The ECB is trying to learn from the 2008 financial crisis, which many believe was so severe because the policy response was too little, too late. The fear of inflation held back the ECB in the last crisis, but both the ECB and Federal Reserve have learned they can purchase significant amounts of government debt without pushing up future inflation. Many Northern eurozone countries opposed relief efforts, such as buying sovereign debt, during the last crisis because of moral hazard. The fact that this crisis was primarily brought on by a pandemic eases concerns over moral hazard and makes it easier for governments to react together. Cooperation will be critical amid such a deep recession. The eurozone economy has a long road ahead to recovery. 

China’s “Wolf Warrior” Diplomats Roar at Hong Kong and the World 

Katsuji Nakazawa, Nikkei Asian Review
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In the years since 2017, China has notably abandoned the “conceal ambitions, hide claws” foreign policy of former premier Deng Xiaoping in favor of a “wolf warrior” diplomatic approach, making clear the nation’s intent to aggressively close the gap between itself and the U.S. China has stated that it has “no intention” of displacing or changing the U.S, but that it will “push back any deliberate insult” and continue its “historic march toward modernization.”

The Trump administration has taken several economic actions to leash the rising dragon. While tensions from the resultant trade war had been simmering down with the phase one trade deal, the pandemic reignited the conflict as the U.S. and others sought damages. The feud reached a boiling point last week as China imposed a new security law on Hong Kong, threatening the fragile autonomy guaranteed by its treaty with the United Kingdom. Some see this case as a litmus test for China’s other international agreements. In any case, military action in India, expansion in the South China Sea, and an increasingly aggressive stance toward Taiwan indicate that China’s new era of wolf warrior diplomacy is here to stay.

Will coronavirus pandemic finally kill off global supply chains?

Alan Beattie, Financial Times
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The death of global supply chains has been predicted in many other times of crisis but the expansion of supply chains has never stopped or reversed. Is it possible that the Covid-19 pandemic could be the force to kill off global supply chains? The World Trade Organization (WTO) estimates the global goods trade will contract between 13 and 32% this year alone. 

The coronavirus has significantly disrupted both supply and demand. Closures of factories, ports, and airports have halted production, reduced trade, and led to increased trading costs. However, it is the demand contraction that is hurting companies the most. According to the supply chain analysis unit of S&P Global, Panjiva, two-thirds of participants in a recent event claimed that demand contraction is the main threat to the company’s earnings in the short term. As explained in the article, there are two sets of decisions facing companies and supply chains. First, companies will conclude whether or not they have overexposed themselves to shocks and will take necessary steps to protect themselves. Second, governments will try to force businesses to either diversify supply internationally or bring their production home. 

China brings two interesting factors into the global supply chain discussion. One, China is not only a massive producer, they have become a giant consumer too. Many multinational companies want a footprint in China to sell as well as to buy, even if there are cheaper production options elsewhere. Two, China’s state help through the Belt and Road Initiative encourages companies to create new supply chains. As long as China continues investing in infrastructure and establishing trade links throughout the world, there will be some life in global supply chains.