The Coronavirus Emergency Aid Bill: What it Can – and Can’t – Accomplish

In plain terms, while the  huge stimulus packages from America and Europe may not stop the economic consequences of closures, outages, and interruptions to businesses, they might induce the type of sentiment that would accelerate economic recovery. 

President Trump Signing COVID-19 $2 Trillion Stimulus Bill

Source: Alphabet, Inc.

Since last month, the stocks have tumbled significantly in response to the likelihood of a recession resulting from the worldwide efforts to contain or slow down the spread of coronavirus(otherwise known as COVID-19). Now, both the European and North American countries are trying to ride to the rescue. Last March, after making a commitment to spend ₤50 billion to cushion its economy from the ravages of COVID-19, the British government announced an additional ₤350 billion in business lifelines, tax relief and loan guarantees.¹ France, Germany, and several other European countries have also unleashed billions of euros in fiscal stimulus, in addition to literary suspending the European Union(EU) debt rules. The largest COVID-19 stimulus package so far came from the United States, with the signing of the COVID-19 bill by President Trump last month – a bill that is worth $2 trillion worth of tax credits, direct payments, and provisions to workers and businesses impacted by the virus’ containment measures.² Given this massive wave of liquidity lurking at this moment, the pivotal question is whether investors are able to set reasonable expectations of what it can – and can’t – do.

In a broader sense, all these huge stimulus packages from America and Europe won’t really stop the economic consequences of closures, outages, and interruptions to businesses and day to day activities. Just like monetary policy, the stimulus packages can’t reopen the stores and restaurants across the nations that have either trimmed store hours or closed voluntarily or because of curfews. It can’t end the lockdown affecting New York City.³ It can’t heal the sick, return people to the workforce, reopen businesses, libraries, or schools. Above all, it can’t force the coronavirus to fade with the flu season that generally begins in April or May. The bottom line is that life will start returning to normal only when this crazy Coronavirus fades. And that will happen after this coronavirus pandemic had run its course at the end of, say, May, regardless of how much stimulus package the European and North American governments load into their metaphorical cannons.⁴

In plain terms, the governments and central banks, including those of Europe and North America, are not saviors. Simply put, the global economy and financial markets don’t really need a savior. The reason for this is clear: business cycles, including the current bear market, turn with or without stimulus. In the long run, stocks usually move in advance of economic data. As a matter of fact, many bull markets have begun long before data improved. Take the last U.S. bull market. When it began in March 2009, the available economic data and corporate earnings were still awful, unemployment rate and bankruptcies were both high, and most countries in Europe and other parts of the world was contracting. The recession did not end until July of that year. Not only that, data revealing the dawning of a bull market also didn’t come out until late summer and early fall of that year – a period that was nearly six months after the stocks bottomed. The implication of this is that stocks seldom wait for improved economic data. In most cases, all the economy and financial markets need to recover is a positive sentiment across the board – the kind of sentiment that creates an easy benchmark for some type of not-as-bad-as-feared reality to crystalize into people’s collective consciousness.⁵

Although some analysts might rightly argue that governments and central banks globally had announced trillions of dollars worth of stimulus before the stocks bottomed in 2009. In my view, that was a lucky coincidence, and I said that for one simple reason: just consider a few years ahead, to 2012. That was the time when Eurozone was in the midst of its sovereign debt crisis⁶ and a recession that began in 2011. Available published evidence revealed that there was no stimulus then. Instead, the governments throughout the currency union implemented the opposite of stimulus: austerity. In spite of that, the Eurozone stocks recovered anyway. And, one remarkable thing about that recovery was that it occurred ahead of the global economic recovery that began in quarter two of 2013. One thing is for certain: an economic stimulus package might provide a jump start to economic recovery, but it’s not always necessary.⁷

There is no doubt that the stimulus measures announced this time will have some positive effect on the economy. However, most of these effects will occur in the months after businesses reopen and life gets back to normal. It is also during this timeframe that the loan guarantees and funding lines for cash-trapped businesses will start producing some reasonable effects. In simple terms, businesses that receive these loan guarantees and funding lines will become able to get over the initial hump after weeks (or more) of lost revenues. When viewed in the light of Treasury Secretary Steven Mnuchin’s comments last month, this is also likely when tax credits will hit American households. Depending on how long interruptions last, the 90-day grace period for April 15 tax payments also announced last month may very well fall within this window too. Moreover, if history is any guide, stimulus measures tend to hit gradually and not all at once. This means that the current stimulus package will be a delayed tailwind, albeit one that would likely linger for a while. Nobody asked me, but I am convinced that the world governments are far overshooting the possible economic consequences of COVID-19 containment efforts. In my view, how effective such efforts could be in terms of making the economic engines of Europe, North America, and Asia to resume firing on both cylinders again hinges on how long the disruptions to business persist.

Many people, including analysts, politicians and some informed citizens have already begun to worry about the associated impact on public deficits. People had similar concerns in 2009, too. The most reasonable answer to those people’s concerns is that the time to crunch those numbers will come later. But for the moment, it is worth noting that long-term government yields are at historic lows across much of the world. In addition, the demand for government bonds with any reasonable yield, particularly  that of Europe and North American governments, is off the chart. It is also no secret that Britain, Germany, France, the United States, and many others could issue 30-year, 50-year, or even century bonds to pay for all these massive expenditures being made to cushion the economic consequences of the closures, outages, and interruptions to businesses caused by COVID-19 pandemic. If these types of bonds, these countries can easily lock in these astoundingly low funding costs for decades. So, what matters most is not the deficits. Given that the potential returns from these bonds would dwarf the marginal cost, what would matter most is not the deficit, but that simple fact.⁸

In closing, pundits would, no doubt, spend a large amount of time analyzing and grading these stimulus plans as their details emerge. I agree: it would eventually be both necessary and beneficial to explore the immediate impact of the COVID-19 stimulus package on households and businesses. However, it is at present besides the point and too early to start debating the efficacy of whatever projects the feds and other central banks choose to invest in or who gets how big a check. In a practical sense, fiscal stimulus of this type is not about the first to spend. Simply put, it is about injecting a significant amount of money into the private sector, where it would have a multiplier effect – that is, where businesses and households can access it and spend and re-spend it. The good thing about it is that the money eventually gets to its best, most productive use, even if it takes up to four spends.  A large body of evidence in the field of finance shows that the market is exceptionally good at guiding these things. It did so last time and mutatis mutandis can do it again. From an entirely practical standpoint, the COVID-19 stimulus package won’t cause a new bull market to begin. That job is the prerogative of market and consumer sentiments. Becoming aware of this fact is a good reason to optimistic that the recovery will carry plenty of vitality whenever it arrives.

References

¹Goodman, D., & Morales, A. (2020, March 20). U.K.’s Sunak Writes Blank Check to Rescue Virus-Hit Economy. Bloomberg News. Retrieved April 5, 2020, from https://www.bloomberg.com/news/articles/2020-03-20/u-k-government-to-help-pay-workers-wages-during-pandemic

²Werner, E., Kane, P., & DeBonis, M. (2020, March 27). Trump Signs $2 Trillion Coronavirus Bill Into Law as Companies and Households Brace for More Economic Pain. Washington Post. Retrieved April 5, 2020, from https://www.washingtonpost.com/us-policy/2020/03/27/congress-coronavirus-house-vote/

 ³Sherman, N. (2020, March 18). New York: The City that Never Sleeps on Lockdown. BBC News. Retrieved April 5, 2020, from https://www.bbc.com/news/business-51880799

⁴Fisher Investments. (2020, March 18). Here Comes the Stimulus. Retrieved from https://www.fisherinvestments.com/en-us/marketminder/here-comes-the-stimulus

⁵ibid, para. 3

⁶Amadeo, K. (2019, October 21). Eurozone Debt Crisis: Causes, Cures, and Consequences. The Balance. Retrieved April 5, 2020, from https://www.thebalance.com/eurozone-debt-crisis-causes-cures-and-consequences-3305524

⁷Fisher Investments, op. cit, para. 4

⁸ibid, para. 6