(Bloomberg) — Forced into record spending by the threat of another Great Depression, policy makers are blurring the lines between borrowing the money they need and simply creating it.Most modern economies have tried to keep the two activities as separate as possible. The typical setup has been for elected politicians to take charge of budgets, and meet any shortfall by borrowing on bond markets –- while the money-printing machinery was walled off in another branch of government, the central bank.But those barriers began to look porous after the financial crisis of 2008. And in the coronavirus slump, they’ve all but disappeared.With entire industries shuttered and unemployment soaring, only public spending is keeping millions of households and businesses afloat. The governments on the hook for this relief effort are running up some of history’s biggest budget deficits. And they’re paying at least some of the bills with what are effectively loans from their own central banks –- debt that can be rolled over indefinitely, and is really more like money.“We’ve had a merger of monetary and fiscal policy,” says Paul McCulley, the former chief economist at Pacific Investment Management Co. “We’ve broken down the church-and-state separation between the two.” “We haven’t had a declaration to that effect,” says McCulley, who now teaches at Georgetown University. “But it would be surprising if you had a declaration — you just do it.”In the U.S., the Federal Reserve is set to buy $3.5 trillion of bonds this year, according to Bloomberg Economics estimates. Most of that will be Treasuries, covering the best part of a fiscal shortfall forecast to reach at least $3.7 trillion. Nobody knows when the debt will be offloaded from the public balance sheet into the hands of private investors, if it ever is.Similar stories are playing out across developed economies from Europe to Japan — and even in some emerging markets, with Indonesia and Poland joining the fray.Behind the longstanding taboo against what is known as “monetizing debt” lies the fear of inflation. History is full of episodes when politicians grabbed control of the printing presses and splashed too much money around the economy, causing prices to spiral out of control and eroding the real value of all kinds of savings, from bank accounts to bond portfolios.Central banks were kept apart from the rest of government precisely in order to apply the brakes when politicians went too far. That autonomy will likely be needed again one day, says McCulley, who helped steer Pimco through the 2008 financial crisis and came up with terms like “shadow banking” and “Minsky moment” to define it. “It’s just not needed now. So for now, let’s just suspend it.”In the pandemic, economists see the threat as coming from the opposite direction -– with deflation a bigger risk. In slow-growing developed countries, policy has already been tilted that way for years. The challenge was to stimulate economies, not cool them down. When policy makers ran out of room to do it by cutting interest rates, they tried other ways. The effect was gradually to undermine the orthodox separation of monetary and fiscal policies. Looking back, it’s hard to see exactly if or when the Rubicon was crossed.After Japan became the first country to hit zero rates in the late 1990s, its finance ministers stepped up deficit-spending while central bankers started to buy up the resulting debt. The purchases were made via banks, not directly from the finance ministry — and they were billed as temporary holdings, not permanent ones. Those nuances allowed policy makers to argue that no monetization had occurred. Critics weren’t persuaded. But the things they warned about, like a spike in inflation or flight from bond markets, never happened.After the 2008 crash, the debate got replayed all over the world as more countries combined bigger budget deficits with so-called quantitative easing. The Fed bought Treasuries in the open market, through a select list of dealers, and other central banks made similar arrangements. And those policies have been taken even further in the current pandemic.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.”It’s been decades since developed economies endured anything remotely like that. Inflation has remained subdued or non-existent, however much governments borrowed or central bankers lent. Its long absence has spurred calls for even bolder policies to drag economies out of the virus slump, even if that means further blurring the lines between debt and money.In the European Union, for example, veteran investor George Soros has proposed that member states join forces to issue “perpetual bonds” that never have to be repaid. He suggested they might pay a coupon rate of 0.5% or so. Lower that by a half-point and the securities would basically be cash, says Alessandro Tentori, chief investment officer at Axa Investment Managers in Milan. “There would be no difference between a 0% perpetual bond and a coin.”Minting coins –- platinum ones, worth $1 trillion each -– is what the U.S. Treasury would do under a bill submitted by House Democrats Rashida Tlaib and Ilhan Omar. The measure would fund stimulus checks for households without adding to the national debt and triggering a fight about repayment down the road, its backers say.If those steps are far-fetched, others are already under way. The Bank of England extended an overdraft to the government. New Zealand’s central bank said it was open to buying sovereign bonds directly. The Bank of Japan has been pegging 10-year government debt around 0%, a policy known as yield-curve control that may get adopted more widely.Governments and their central banks will likely stop short of overtly turning public debt into money, judging that the risks to monetary stability outweigh any benefits, according to Nicola Mai, a portfolio manager at Pimco.“I don’t think you necessarily need that explicit cooperation,” he says. “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.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
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Tesla’s HR is ruffling some feathers, announcing to employees that should they decide to not return to work immediately they could lose unemployment benefits. Reddit, the popular online forum, is beta testing two Ethereum-based tokens for users to earn rewards for contributing content, The Block has learned.The post Reddit to launch Ethereum-based tokens for cryptocurrency and Fortnite subreddits appeared first on The Block.
Nvidia uses their AI expertise to fight COVID-19. Yahoo Finance’s Dan Howley joins the On The Move panel to discuss.(Bloomberg) — The pound is back to being the pariah of the currency world as renewed Brexit risks worsen the troubles of a market still reeling from the shock of the pandemic.Sterling fell a fifth day against the dollar on Friday after the latest negotiations between the U.K. and the European Union seemed set for a stalemate, with both sides refusing to compromise on key issues such as trade and movement of citizens. The pound is already the past month’s worst-performing Group-of-10 currency and options signal more pain ahead.British Prime Minister Boris Johnson threatened to walk away from the talks this week if enough progress wasn’t made. That raises the risk that the U.K. will end its transition period on Dec. 31 without a free-trade deal — putting further strain on an economy that’s already facing the worst recession in three centuries.“Brexit has reared its head again,” said Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank. “After hibernating since the end of last year, it looks like Brexit isn’t quite finished as a bearish factor for sterling. G-10 currencies remain highly risk-driven against the dollar, but the return of these concerns could emerge as a significant differentiator for sterling.”Buffeted by successive elections, failed parliamentary votes and shifts in monetary policy, volatility in sterling was at one point on par with those seen in riskier, emerging-market nations. The pound is already among the most volatile among G-10 currencies, second only to Norway’s krone this year.The pound has fallen 1.7% this week to around $1.22, on track for the worst such decline in almost two months. A close on Friday below the $1.2166 — a level that proved to be a key chart support in recent weeks — could set the stage for further losses, according to Rumpeltin.Lee Hardman, a strategist at MUFG, sees the U.K. currency slipping to $1.20 or even lower in the short term. While the consensus call in a Bloomberg currency survey is for sterling to climb 3% from current levels to end the year at $1.26, this is significantly lower than the $1.33 predicted just two months ago.“There is an increasing risk that investors view the outlook for the U.K. more negatively relative to elsewhere, thus encouraging increased speculative selling,” MUFG’s Hardman said. “The U.K. is in the unique position of having a considerable risk on the horizon in relation to the E.U. trade negotiations.”Two-month pound-dollar risk reversals, an options gauge of positioning that cover the June 30 deadline for any extension of a Brexit transition period, continue to signal a markedly bearish outlook for the U.K. currency.Bloomberg’s pound-dollar volatility calendar shows traders are not yet looking for significant price swings in the pair either at year-end or on June 30, suggesting the risk of market complacency that could leave sterling susceptible to wide fluctuations if Brexit talks turned more tense.The EU’s chief Brexit negotiator Michel Barnier is due to give a press conference Friday on this week’s round of negotiations.“Do I expect a significant deterioration in talks at this stage? No, as there are still the June and September rounds before the hoped October “soft” deadline,” said Jordan Rochester, a currency analyst at Nomura International Plc. “But it would help focus minds if Barnier turns up the temperature. We remain short sterling.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
Stock futures were lower Friday morning after a whipsaw session on Thursday, as investors continued to weigh new economic data and earnings results against hopes of a speedy economic reopening.
(Bloomberg) — Gold and silver are finishing the week on a high note, lifted by concerns over economic growth, a second wave of virus infections and simmering tensions between the U.S. and China.Gold headed back toward its peak in April, when prices hit the highest since 2012. Silver jumped to a two-month high. Prices are having a long-awaited breakout moment as market anxiety mounts, according to Rhona O’Connell, head of market analysis for EMEA and Asia at INTL FCStone.“There are fears over everything from political leadership through the health outlook overall and associated economic financial and political risk,” she said.Spot gold was up 0.3% at $1,735.41 an ounce at 9:54 a.m. in London, heading for its second weekly gain. Silver jumped as much 3% and traded near $16.20 an ounce, with its discount to gold coming down from recent records.Investors turned to safe havens after U.S. Federal Reserve Chairman Jerome Powell warned earlier this week that the pandemic will take a heavy toll on the economy. Fears intensified on gloomy American unemployment data Thursday, and as President Donald Trump said he doesn’t want to talk to his Chinese counterpart right now.Nations that enjoyed success quelling the virus, including South Korea and China, now face a rising number of infections. In the U.S., Texas saw its deadliest day and its biggest jump in new cases since the start of the outbreak. That comes two weeks after controversial moves to reopen the state’s economy.“The market seems to be bracing itself for disastrous hard data for April and May and a wave of bankruptcies,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. That supports the traditional safe haven gold, and “has added some extra spice to silver,” he said.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.