Yesterday, Italy famously extended its national quarantine to the entire Italian peninsula from the Alps to the Mediterranean. By the end of the day in Washington, President Trump was promising a morning news conference to announce a major package of fiscal policy measures designed to cushion the economic blow from the virus outbreak.
So when this morning the daily Policy Risk Measurement chart showed that policymakers were mostly talking but taking no action, the readings seemed counter-intuitive.
Within hours, it became clear that the chart indeed accurately anticipated what 10 March 2020 would look and feel like regarding coronavirus (or just about any other) policy.
Tomorrow's policy risk measurements will certainly reflect more action because President Trump went to Capitol Hill to negotiate with Congress (itself, an unusual move) and because European Heads of State and Government held a video conference to discuss policy moves.
But in the end, policymakers technically took zero action today. Today's Quote of the Day compares what policymakers were saying in Brussels and in Washington. Look closely at the language: they said the same exact thing:
The good news, for people who are fretting about the lack of cross-border coordination, is that the heads of stage and government of the two largest global reserve currencies are actually in sync with each other.
Read the statements closely and it becomes clear that policymakers on both sides of the Atlantic are not yet taking any concrete moves to mobilize scarce fiscal resources. They are promising they will do so when necessary. And in the interim they are promising to enforce existing rules with flexibility.
The policy harmony extends to the banking system at least in kind if not in degree. U.S. federal banking regulators yesterday released a statement urging banks to be lenient with respect to payment difficulties among customers. The also promised to treat such forebearance (and staffing challenges, if they arise) with lenience at the regulatory level. Italy went farther. The Deputy Economy Minister declaring a moratorium on mortgage payments; the Wall Street Journal indicated today that the moratorium would extend to businesses as well as individuals.
Technically, the regulatory policy moves are small compared with other options. As we noted last week, fiscal policy is likely a more effective way to address the near-term supply shocks associated with the COVID19 outbreak. And the broader fiscal policy priorities articulated today by policymakers suggests a tight focus on near-term impacts as well.
Many will be disappointed. Concerns regarding disrupted supply chains and consequent shortages of crucial supplies (e.g., medical equipment, pharmaceuticals) as well as other consumer goods (e.g., wedding dresses, automobile components) are rational. But they have not yet materialized.
Those whose frame of reference regarding crisis response functions starts and ends with the global financial crisis of 2008 and the EuroArea bond market crisis of 2010-2012 reflexively seek monetary policy easing as the solution to all market uncertainty. This is a mistake. These monetary policy tools address demand shocks for the economy as a whole. Currently only certain sectors are experiencing demand shocks (notably, the travel, transportation, and tourism sectors). Attacking these demand shocks with tools that impact the entire economy --which in most countries was strong when the virus hit -- could end up doing more harm than good.
Policymakers are holding their powder at present.
This is understandable. While it is clear that the global spread of a new virus in the first quarter of 2020 will have an impact on the global economy, it is far less clear how widespread that impact will be outside China. Some second-order consequences of the global virus transmission emanating from public policy decisions could well intensify the adverse economic impact far beyond a temporary closure of manufacturing facilities in Wuhan.
Shuttering for nearly a month a G7 economy that started 2020 with a heavy debt load, anemic growth, and intensifying generational pressures may end up generating far more severe economic spillovers in the medium-term....after most people have recovered from the virus and have returned to work.
Subtle but important shifts in sourcing practices away from foreign suppliers will hold significant adverse implications for aggregate growth rates, increased consumer prices, the geopolitical balance of power, and the already shaky global trade policy infrastructure at the World Trade Organization.
Continued oil price shocks -- generated by shifting geopolitical priorities -- will have at least as an important impact on the global economy.
Corporate decisions to accelerate adoption of workforce automation and distributed work technologies may accelerate existing structural shifts in the economy that favor the educated and skilled, intensifying income inequalities that drive political extremism and populism.
While all the scenarios above (and more) are possible, they are not a certainty at this stage. The tricky thing about monetary and fiscal policy is that it requires assumptions about future behavior and expectations as well as future economic trends. For central banks seeking to fend off competition from cryptocurrency issuers, their commitment to deliver financial stability based on concrete data suggests they will be reluctant to return to the Zero Lower Bound without concrete data showing that economic disruption is both (I) more widespread beyond travel, transportation, and tourism and (ii) is triggering a deep demand shock even after the worst of the illness has passed.
It is not a foregone conclusion that we are on a highway towards a dystopian narrative with no exit ramp.
The human toll regarding the virus is staggering in China. The World Health Organization is indicating that the impact could be -- but is not guaranteed to become-- staggering in Europe and the United States. Widespread awareness and transparency regarding the risks may yet help others become more vigilant about personal safety even as health care professionals mobilize.
If we are very lucky, the worst possible outcomes may narrowly be avoided. In the meantime, hold on to last week's infographics and follow like a hawk the decisions policymakers announce each day. Strategic direction is set at the inflection points. You can count on us to count each action and automatically draw you a picture so you can assess the risks with the best information possible.
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