An earlier version of this post originally appeared at Traders Insight hosted by our strategic partners at Interactive Brokers in order to promote tomorrow's webinar with them. Blog members are more than welcome to join us tomorrow at noon EST to see what today's platform data tells us about tomorrow's policy trajectories. Please use THIS LINK from Interactive Brokers to register for the webinar.
During March, economic policymakers unleashed an unprecedented range and scale of economic lifelines to businesses and individuals in response to the intensifying pandemic. The array of initiatives is impressive not only for its scale and scope but also in relation to how quickly they were deployed. Within a two week period, policymakers reached the equivalent of DEFCON (Defense Readiness Condition) 2 and, in some cases, DEFCON 1. War-related rhetoric was prevalent in multiple countries.
As the chart above indicates, we enter April in DEFCON 2 with respect to monetary policy, fiscal policy, and financial regulation.
Importantly, different sectoral policymakers proceed across the DEFCON levels at different rates. Central banks were the first to reach DEFCON 1. Financial regulators have been straddling the line between DEFCON 2 and 1 since most regulators in the advanced economies have informally encouraged banks to provide maximum flexibility to borrowers experiencing difficulty servicing debts or clearing obligations in the trading arena.
The data from our PolicyScope platform illustrates the dynamic in a dramatic manner:
Action regarding COVID-19 (which is the term policymakers prefer to use when taking technical action) far outweighed rhetoric from the end of February to the end of March.
Some may question whether policymakers have any fire power left to address the pandemic if disruptions and catastrophic loss of life in the advanced economies (which drive global growth) should persist into the summer. The answer is yes, but it is going to be a long haul.
Central banks and financial regulators can make important, incremental moves to expand existing facilities. Fiscal policymakers can expand stimulus and subsidy support structures. However, there may be real limits on how far these fiscal tools can – or should be – used if tax payments remain suspended as well. The broad substitution of sovereign risk for private risk through guaranteed loans is not well understood from a risk perspective across all credit instruments, from loans to small- and medium-sized companies to sovereign debt issuance. Subsidies can profoundly distort competition and be difficult to unwind later, after the crisis has passed.
This leaves trade ministers as the main mechanism for additional economic support. As noted above, trade ministers have been the last to engage. This is not surprising. Supply chain disruptions occur not infrequently; they are often remedied within a quarter. Trade ministers are usually the last to issue “WIT” (whatever it takes) rhetoric. Despite an elaborate process to promote cross-border cooperation, trade policymakers are more at risk for taking contradictory action during periods of stress. As noted recently, policymaking at the base of Maslow’s Hierarchy of Needs sometimes requires policy choices that in ordinary times would generate rancor and concerns about trade wars.
In the current situation, selected decreases in import tariffs by some countries has been offset by the proliferation of export bans from 80+ countries with respect to medical equipment and, last week, some agricultural products. Extended periods to clear shipments at the dock and at border crosses create non-tariff barriers to imports that exacerbate supply chain tensions. This increases the risk of deep supply chain ruptures that will be far more difficult to address. As we noted in this reasearch note for the Mercatus Center last week, the time has come for trade ministers to take comparably broad and bold action to their fiscal, monetary, and financial regulations colleagues.
The global pandemic has not yet peaked. Policymakers can continue to relax rules and stay within DEFCON 4 for quite some time. The next moves will likely be technical and incremental in most areas. The trade and fiscal policy arenas will likely see the most action in the near-term.
So stay tuned. Our PolicyScope platform will capture every incremental move as the pandemic peaks and then again when the economy is ready to return to normal.
BCMstrategy, Inc. is a start-up company using patented technology to automatically measure and analyze global public policy developments. The company began tracking daily global COVID19 activity in late February 2020, which means the company has captured in its time series the full global reaction cycle for this issue as it occurs. For more information and to get started using the next generation of policy intelligence tools, please visit www.policyscope.io.