Trump’s $1.2 Trillion Won’t Do It. Try $2.5 Trillion

President Donald Trump’s administration proposed $1.2 trillion plan to counter the economic crunch brought on by the coronavirus. It is a step in the right direction. But we need a much bigger and much better targeted fiscal stimulus.

Like most forecasters, I expect a considerable amount of economic drag from Covid-19 and social distancing. However, unlike them, I see this drag lasting well into next year. This recent analysis from a team of researchers in the U.K. suggests that, until a vaccine is developed, governments will have to choose between two unpalatable options:

— exponential growth in the number of Covid-19 patients, which will crush health-care systems in a matter of weeks

— or stringent social-distancing policies to keep disease transmission under control

Using either of these options — or alternating between them — is likely to be associated with large amounts of uncertainty for businesses and households. This uncertainty will impose a significant burden on the U.S. economy until a vaccine is implemented, which experts say might only be available by late 2021.

Responding to this kind of protracted slowdown will require a bigger stimulus than the 6% of gross domestic product proposed by the administration. Instead, policy makers should be planning for two years in which, in the absence of a fiscal intervention, the output gap will be significantly negative — possibly as much as 6% of GDP, or on the same scale as the recession caused by the 2008-09 financial crisis. It’s going to take a much larger fiscal infusion to make up for that shortfall — something more on the order of $2.5 trillion rather than $1.2 trillion.

In designing a fiscal stimulus, it is important to ensure that the money gets into the hands of those with the highest propensity to spend it. The administration’s plan doesn’t seem to meet this criterion. A payroll-tax cut puts money into the hands of those who already have a job. But they typically have a lower propensity to spend than those who are unemployed. Meanwhile, a bailout of the airlines serves to protect the wealth of their shareholders and debt holders. But those people also typically have a lower propensity to spend than those who with limited financial resources.

How, then, should a fiscal stimulus be structured? There are many ways to improve on the Trump administration’s proposal. Here are three proposals that I see as useful. First, the government should pay $10,000 to every adult and child younger than 40. They are more likely to go out and spend this money, partly because Covid-19 presents much less of a health risk to them. Second, the government should pay a bonus to each person who gets tested for the coronavirus (as long as they haven’t been tested in the prior week). Finally, as was done in the Great Recession, the government should both increase and extend unemployment-insurance benefits beyond the normal 26 weeks.

We know there is going to be a downturn and, unfortunately, there are good reasons to believe that it will be both long and deep. The Federal Reserve has done what it can using monetary policy. Now we need a strong and well-designed fiscal policy response from the U.S. government.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

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08.07.2020 15:14
Forex — Dollar Edges Higher as Virus Cases Grow

The dollar edged higher in early European trade Wednesday, with the safe haven currency in demand as a resurgence of the coronavirus in the United States cast doubt over the strength of the economic rebound.

At 3:050 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 96.873.

EUR/USD was up 0.2% at 1.1280, while USD/JPY was flat at 107.52.

There are almost 11.8 million COVID-19 cases globally as of July 8, according to Johns Hopkins University data, of which the U.S. has the highest known numbers of cases and deaths in the world.

A number of Federal Reserve officials expressed concern Tuesday that the surge in infections could adversely impact the economy just as some stimulus programmes are set to expire.

Atlanta Federal Reserve Bank President Raphael Bostic warned that the spike in the number of cases has made business owners “nervous again” and that ‘there is a real sense this might go on longer than we have planned for.”

Still, the rise in cases is not simply a matter for America. The AUD/USD pair lost 0.2% to 0.6935, with the Australian dollar weakening after the country’s second-largest city Melbourne re-imposed lockdown measures to curb the outbreak.

Elsewhere, GBP/USD gained 0.2% to 1.2559 after Prime Minister Boris Johnson said that the U.K. remains committed to working hard to find an agreement over trade with the EU. Chancellor of the Exchequer Rishi Sunak is due to announce details of the country’s latest fiscal stimulus package later Wednesday.

Sterling has gained around 0.6% this week against the dollar and 0.4% against the euro, but still remains one of the weakest G7 currencies as doubts still remain as to whether a trade deal will be signed by the end of the year.

Additionally, skepticism exists that a proposal by some of Donald Trump’s advisers to undermine Hong Kong’s currency peg would come to fruition, as such a move would be difficult to implement and risk hurting U.S. interests as much as it would punish China.

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08.07.2020 13:12
Risk aversion sends gold higher, oil downwards

Oil retreats slightly on risk aversion
With one eye on the equity markets overnight, oil markets mirrored the response of currency markets, giving up some of their recent gains and slipping into range trading mode. Brent crude fell slightly by 0.70% to 42.90 a barrel. WTI eased by 0.70% to USD 40.50 a barrel.
Both contracts are unchanged this morning in Asia, with critical resistance on Brent crude at USD 44.00 a barrel, and on WTI at USD 42.00 a barrel. Only a fall below USD 40.00 a barrel for Brent crude, or USD 37.00 a barrel for WTI, would suggest that the rally in oil prices has run its course.
Oil prices continue to remain balanced between Covid-19 induced growth concerns, and recovery expectations in Asia and Europe. Oil’s downside is likely to be limited unless the US situation deteriorates dramatically. OPEC+ discipline is high, and the grouping will no doubt find the willingness to extend the headline cuts if the situation calls for it.

Excitement builds for gold longs as USD 1800.00 approaches
Anticipation is building in the gold fraternity, with Covid-19 concerns giving a haven boost to prices overnight. Gold rose 0.60% to USD 1795.00 an ounce, having tested USD 1797.00 an ounce earlier in the session. Gold’s grind higher is remorseless and pleasingly, appears to have detached itself from negative equity price action for now.
The USD 1800.00 an ounce region will be a tough nut to crack though. It capped gold’s advance multiple times from 2011 to 2012. I do not doubt that there will be substantial option related offers ahead of it to defend USD 1800.00 strikes. Nevertheless, gold is girding itself for the long-awaited assault on this critical resistance level. Gold had support at USD 1775.00 an ounce. Only a daily close below here would delay proceedings. Should USD 1800.00 an ounce give way, gold is likely to move quickly to the USD 1820-1830 zone, driven by stop loss and algorithmic buying.
Gold is unchanged in Asia today in yet another moribund session. It will probably be left to the New York market to get the job done.

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07.07.2020 12:23
Oil prices fall on demand concerns from U.S. coronavirus case surge

Oil prices fell on Tuesday, erasing earlier gains, on concerns that the surge in coronavirus cases in the United States, the world’s biggest oil user, will limit a recovery in fuel demand.

U.S. West Texas Intermediate (WTI) crude (CLc1) futures fell 17 cents, or 0.4%, to $40.46 a barrel at 0340 GMT, after earlier rising to as high as $40.79.

Brent crude (LCOc1) futures declined by 19 cents, or 0.4%, to $42.91, after hitting an intraday high of $43.19.

With 16 U.S. states reporting record increases in new COVID-19 case in the first five days of July, according to a Reuters tally, there is mounting concern that public health measures to limit the virus spread will curb fuel demand.

Florida is re-introducing some limits on economic reopenings to grapple with rising cases. California and Texas, two of the most populous and economically crucial U.S. states, are also reporting high infection rates as a percentage of diagnostic tests conducted over the past week.

«The potential for demand destruction as lockdown re-instatement looks more likely are combining with concerns about OPEC+ discipline to weigh on oil prices,» said CMC Markets’s Chief Market Strategist Michael McCarthy in Sydney in an email.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia, collectively known as OPEC+, are lowering output by 9.7 million barrels per day (bpd) for a third month in July.

However, those cuts are set to taper to 7.7 million bpd starting next month, adding supply at the same time U.S. fuel demand, especially for gasoline, remains impacted by the COVID-19 outbreak.

«Summer driving demand in the U.S. is low, keeping gasoline demand subdued, and a reintroduction of lockdowns is a major headwind,» ANZ said in a note.

Data from the American Petroleum Institute industry group later on Tuesday and the U.S. Energy Information Administration on Wednesday are expected to show a 100,000 barrel rise in gasoline stockpiles, six analysts polled by Reuters estimated.

The U.S. crude market faces some uncertainties from a court decision on Monday ordering the shutdown of the Dakota Access pipeline, the biggest artery transporting crude oil from North Dakota’s Bakken shale basin to Midwest and Gulf Coast regions, over environmental concerns.

Market sources in the Bakken said the closure of the 570,000-bpd pipeline, while a thorough environmental impact statement is completed, will likely divert some oil flows to transportation by rail.

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