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Global Liquidity Trap


Viking
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Global liquidity trap. Here is the original article. Is this the pink elephant in the room that nobody sees?

 

Solution? Global fiscal stimulus?

Watch out? Countries using currency devaluation as policy tool in attempt to get domestic economic growth?

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Source article: Global liquidity trap requires a big fiscal response

- https://app.ft.com/content/2e1c0555-d65b-48d1-9af3-825d187eec58

 

Fighting the worst economic downturn in living memory, policymakers around the world have responded forcefully. Discretionary fiscal support of about $12tn has eclipsed previous records. Central banks, by going big with monetary easing, liquidity injections and asset purchases, have prevented financial catastrophe. Now we are in a global liquidity trap. The ascent back from what I have called “the great lockdown” will be long and fiscal policy will need to be the main game in town.

 

For the first time, in 60 per cent of the global economy — including 97 per cent of advanced economies — central banks have pushed policy interest rates below 1 per cent. In one-fifth of the world, they are negative. With little room for further rate cuts, central banks have deployed unconventional measures.

 

Despite this effort, persistently low inflation — and in some cases intermittent deflation — has raised the spectre of further monetary easing to achieve negative real rates if another shock strikes. It has led to the inescapable conclusion that the world is in a global liquidity trap, where monetary policy has limited effect. We must agree on appropriate policies to climb out.

 

The central banks’ measures have been essential to meet the liquidity needs of businesses and households and to preserve jobs. Yet such policies are limited in their ability to stimulate demand. Solvency risks now predominate. Vulnerable but viable firms require support, a problem that is much better addressed by fiscal policy.

 

Before the pandemic, there was a worrying consensus that low-for-long interest rates had promoted excessive risk-taking that heightened financial stability risks. The striking disconnect of financial markets from real activity in the recovery from the Covid-19 crisis reinforces these notions.

 

There is also a greater risk of currency wars in a global liquidity trap. When interest rates are near zero, monetary policy works to an important extent by weakening currencies to favour domestic producers. With the pandemic already testing the limits of multilateralism, the world can ill-afford the escalation of tensions that competitive devaluations are likely to generate.

 

Fiscal policy must play a leading role in the recovery. Governments can productively counter the shortfall in aggregate demand. Credit facilities installed by monetary authorities can only assure the power to lend but not to spend, as US Federal Reserve chair Jay Powell has noted. Fiscal authorities can actively support demand through cash transfers to support consumption and large-scale investment in medical facilities, digital infrastructure and environment protection. These expenditures create jobs, stimulate private investment and lay the foundation for a stronger and greener recovery. Governments should look for high-quality projects, while strengthening public investment management to ensure that projects are competitively selected and resources are not lost to inefficiencies.

 

Many economies can lock in historically low interest rates now and keep debt servicing costs low. The IMF’s latest projections are for economic growth to increase at a faster rate than debt service costs in many countries — and by an even bigger margin in absolute terms than before the pandemic. This implies that debt service costs could fall. That would provide room in many economies for investment in inclusive, strong and sustainable growth, without compromising debt sustainability or bond market access.

 

The importance of fiscal stimulus has probably never been greater because the spending multiplier — the pay-off in economic growth from an increase in public investment — is much larger in a prolonged liquidity trap. For the many countries that find themselves at the effective lower bound of interest rates, fiscal stimulus is not just economically sound policy but also the fiscally responsible thing to do.

 

While all countries will need to deploy fiscal policy, the stimulus size will clearly vary. Those that entered the crisis with elevated debt and weak growth prospects will need to prioritise spending and seek financial support. Those whose debt is unsustainable should restructure as soon as possible to free up resources to fight this crisis. All countries should build medium-term fiscal frameworks to ensure debt remains sustainable, including through structural reforms, revenue-raising measures and cuts to wasteful spending.

 

This is a once in a lifetime crisis. Policymakers have responded strongly, averting an even deeper recession. Monetary policy has and will remain central to this effort, but with the world in a global liquidity trap it is time for a global synchronised fiscal push to lift up prospects for all.

 

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Viking,

 

How much cash are you, yourself,  sitting on as of now? [ : - ) ]

 

John, i am sitting at a little over 50% cash as of today. I have been opportunistic this year moving in and out of positions (mostly BRK, although i do not own any right now). Lately i have been building positions in pipelines, utilities, and companies i view as pretty safe (SAP the most recent example). I am in no hurry to get more fully invested as i have had a good year (return wise) and, as i have said before, capital preservation is more important to me right now than portfolio return.

 

I am struggling with two competing narratives: rising virus case counts and a slowing economy (double dip) versus positive news on the vaccine front.

 

We also are in the honeymoon phase of a Biden Presidency. The risk is if Republicans and Democrats continue to war and we get limited fiscal support moving forward.

 

Looking out a little further i am also trying to understand the secular disinflation/mild deflation trend. My current view is i think rates will be much lower for longer with the very real possibility rates could go negative in the US.

 

I think there is a scenario where we get:

1.) continued spike in virus numbers into January or February

2.) slower than expected news on the vaccine front (delays and/or not very effective)

3.) gridlock in US resulting in limited fiscal stimulus

4.) a second economic contraction as we begin the new year

 

No idea how this all plays out. I will continue to be cautious with my portfolio until i get some more clarity. If i was younger and holding down a full time job (with growing savings) i would likely be fully invested and aggressively buying more with new money on any big sell offs. Buy my current positioning fits my objectives and allows me to sleep well at night :-)

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Viking as someone who is also sitting on quite a bit of cash would be great to hear your updated thinking.

 

Vaccine news is very promising but as might not be available for mass distribution for some time doesn't take off the table the possibility of rolling lockdowns until the spring and also might reduce the appetite for a large stimulus bill. And perhaps with a vaccine on the way politicians will be more inclined to play it safe and impose restrictions with the knowledge it will be the last lockdown

 

 

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Viking as someone who is also sitting on quite a bit of cash would be great to hear your updated thinking.

 

Vaccine news is very promising but as might not be available for mass distribution for some time doesn't take off the table the possibility of rolling lockdowns until the spring and also might reduce the appetite for a large stimulus bill. And perhaps with a vaccine on the way politicians will be more inclined to play it safe and impose restrictions with the knowledge it will be the last lockdown

 

My view is the virus news today is very encouraging. Very. If other companies report similar efficacy results then we will be in a good place. My guess is we will limp along until spring or perhaps even summer. But if we are able to get to a new normal by May or June that will be phenomenal.

 

There is a lot of pent up demand out there. The sectors that have been crushed should do very well (perhaps by mid 2020).

 

Near term the virus and economic news will be terrible. However, my guess is that will not matter much IF the news on the virus front improves from here. I will likely continue to add to my equity positions.

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Viking,

 

Thank you for elaborating on your views and overall perceptions. [ : - ) ]

 

Please pardon me for talking behind your back below the divider placed below this. -It's not exactly libel. [ ; - ) ]

 

- - - o 0 o - - -

 

mattee,

 

I'm an old bugger [62, to be exact]. It's now more than 5 years ago, that I received my last salary. [in fact, the last payment wasn't really a salary, but a friggin' huge bonus for delivering during 1½ years on what was a "mission impossible"! [ ; - ) ]].

 

After getting some rest and restitution over a period of time, after burning my candle in both ends, I evolved a habit of reading CoBF "in another dimension", so to say :

 

1. Pick a CoBF member, whose posts seem to have some personal appeal to you,

2. Find a post by that particular CoBF member, and click on that particular CoBF members board handle [, on the left side on your screen], so that you get that particular CoBF members board profile,

3. Click on "Show posts" [to get that particular CoBF member's posts - since registration here on CoBF],

4. Start reading! - Oldest posts first! [-And remember and picture the market & macro environment at that particular point in time of each post - and in all other ways the historical context of each particular post.]

 

You'll be amazed of you get:

 

a. The best investment lecture you'll get anywhere,

b. Outsized investment returns, combined with modesty & no pulling of the bragging rights here on CoBF, &

c. Consistency in investment approach.

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