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Coronavirus Update – How Governments Are Financing Recovery Efforts

Our conventional understanding of economics might receive a shot in the arm with the coronavirus pandemic. It is increasingly becoming clear that an obsession with fiscal discipline will lead to starvation, deaths, and unemployment at these times.

That’s why governments around the world have gone on a spending spree to pull themselves out of this slump. Not all that money is being brought out through the market or the existing reserves. A large part of that is being done through the frowned-upon activity of raiding the reserves of Central banks and printing currency notes to finance these debts.

The fiscal policy and monetary policy are meeting each other. This means that the wall between the government and the central bank is slowly breaking down into pieces. Let’s find out the implications of this according to the experts.

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Coronavirus Update - How Governments Are Financing Recovery Efforts

WHAT ARE THE IMPLICATIONS OF FINANCING RECOVERY EFFORTS THIS WAY DURING THE CORONAVIRUS PANDEMIC?

The people who’ve kept a watch on world economics are saying that this shouldn’t be seen as much of a departure for the developed countries. Their spending rates have been on the rise for quite some time due to the low amount of money funneled out by people.

Japan has been floating zero interest rates for the past 10 years and financing through printing money as long as you can remember. This means that the world is now replicating these examples.

There was no real alternative, according to Stephen Roach, a senior lecturer at Yale. “The economy is in the biggest hole it’s ever been in, so we need massive fiscal stimulus,” he said. “The central bank has to be brought in to fund it.”

That doesn’t mean there are no consequences, said Roach, a former nonexecutive chairman of Morgan Stanley in Asia. In the U.S., the Fed-backed spending spree means that “inflation is likely to begin moving up post-virus,” he said. “Bond-holders always get punished in a period of rising inflation.”

Coronavirus Update - How Governments Are Financing Recovery Efforts

This is what Nicola Mai had to say about the link between central banks and the federal government –

“I don’t think you necessarily need that explicit cooperation.”

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Mai is a portfolio manager at Pimco . He added –

“It’s an implicit cooperation.”

But the result isn’t so different –

“The bank is effectively backing the sovereign market – allowing the government to spend money.”

It remains to be seen whether economies are able to recover smoothly after the Coronavirus. Early signs are not very hopeful. A great degree of financial discipline will be required by the governments as well the people plus central banks to avoid the crisis now which is wreaking havoc upon the entire big world at this point.

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Rhythm Bhatia

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