Governments are finally getting the message that they’ll have to run exponentially bigger budget deficits to stay afloat as the coronavirus brings the world economy to a sudden halt.
Capitals from Berlin to Washington and Canberra this week are shaking off fiscal restraint and vowing to fight the virus’s economic fallout with a blitz of spending. With the tally of pledges approaching $2 trillion worldwide and rising almost daily, much of the funding shortfalls will have to be financed with public debt.
President Donald Trump endorsed checks to every U.S. household in a stimulus plan that settled at $1.2 trillion. Australia will also provide handouts, and Japan may too. Having already dropped her loyalty to a balanced budget, German Chancellor Angela Merkel even said she was willing to discuss pooling the euro-area’s borrowing capacity.
For many, the question is what took them so long as the virus’s spread from China looks set to tip the world into its first recession since 2009 and central banks are running low on ammunition.
While there aren’t many silver linings in the world economy right now, one is the fact that even with their jump in the past 24 hours, market borrowing costs across the world are near historic lows, making it easier for most governments to fund a massive stimulus response.
Also supporting the splurge is that it is likely cheaper to act now to keep households, small businesses and industries afloat than not help out and watching the looming recession spiral toward depression.
“In a wartime situation you always borrow like mad,” said Ed Yardeni, president and chief investment strategist of Yardeni Research Inc., who coined the term “bond vigilantes” in the 1980s. “The way we got through World War II, the government borrowed a lot of money and the Federal Reserve agreed to peg interest rates at extremely low levels and in effect, that is what we are seeing now.”
The market capacity to lend will not be limitless. On Tuesday as the scale of U.S. measures was announced, the yield on the 10-year Treasury surged by the most in a day since 1982.
But markets likely won’t have to supply all the additional funds, since central banks like the Federal Reserve are poised to step up their purchases of government debt.
The 10-year U.S. Treasury rate was still just 1.19% at 9:05 a.m. London time, compared with the five-year average of 2.25%. Strategists from Deutsche Bank AG noted in a report Monday that the fiscal stimulus will “lead to a permanent scar on government balance sheets that were already stretched.”