Economic stimulus and the Role of Central Banks

Politics preventing new financial stimulus

The economic recovery in the major global economic powers depends on several important factors. One of the most vital part, the spread of the virus and the government's answers to it. With a decrease in daily cases of COVID-19 to 50,000 in the U.S.A. Yet U.S. A remains the most significant global threat being the largest economy in the world. The trend of the virus in Europe has begun to worsen. With the majority of countries experiencing an increase in the past weeks.

The economic impact of global shutdowns, although severe, was cushioned by massive government aid and hawkish monetary responses everywhere. The U.S., after a slow start, introduced the most aggressive fiscal response in the form of its $3 trillion CARES Act. This funnelled cash to businesses and workers impacted by the pandemic and got forced into lockdown. 

Want to see our trades live?

Join our premium trading community to:

  • See our top trade alerts from our analysts
  • Access our VIP chatrooms with traders worldwide
  • Access our training material exclusive to members
  • Exclusive access to articles

It had a significant impact on consumers, in particular despite a 10% reduction in salaries of employees in April. Due to substantial job losses, individual incomes in the U.S. A grew by approximately 10% due to a doubling of government funding. This mainly came through further unemployment assistance that entitled people to an additional $600 a week in aid. Despite this surge in government support, the household savings ratio increased to over 30% in contrast to an average savings rate of just 7%. Only to fall falling to 19% in June. However, there are critical factors here that contribute to the falling of savings rate: Those in the higher-income brackets, who would be less likely to have been affected, have seen savings spike. Those who were more likely to have needed the additional unemployment aid had a higher inclination to consume their stimulus cheque on necessities. Consumer spending is vital to any economy, especially in the U.S.A., which accounts for the vast majority of U.S. A GDP, is therefore vulnerable to the suspension of this stimulus cheque. 

These payments have been stopped at the end of July, and although President Trump has authorised a temporary (reduced) cost, there is no certainty about the policy beyond the end of this month. This is due to the ongoing conflicts between Republicans and Democrats on the next stimulus package. Democrats initially intended a package worth $3 trillion, with Republicans at $1 trillion. It appears that significant steps forward have been made towards a new stimulus package, but notable differences among them still remain. 

Given the fast-approaching nature of the election, it is unlikely that legislators on either side want to be criticised for another spending slip and citizen unease. That is why I still think a deal will be completed. Given the ongoing excitement within equity markets, it is likely that the market is also anticipating a deal to be done. 

Draghi returns  with Advice for policy maker

Former E.C.B. president Mario Draghi sent the current policymakers some critical advice about how best to control this financial crisis. His advice is really deserving of notice.

The speech is jumbled with historical quotations, such as to the wars, the global financial crisis of 2008 and the euro sovereign crisis of 2010, but we take away a few crucial bits of advice that are relevant to how policymakers may deal with today's obstacle. 

  1. This crisis is something modern policymakers have not yet seen so needs flexible thinking and innovative solution. The urgency and severity of the economic downturn caused by the pandemic that sticking rigidly to conventional views of monetary and fiscal policy risks worsening and lengthening the downturn the world is in. Policymakers in this crisis have shown to be realistic in introducing economic and fiscal assistance which we have never seen before. These actions have cushioned the fall for employees and corporations. For this efficient response to the global recession, they earned our respects. In European circumstances, it was feared that monetary rules would hurt governments from making these kinds of decisions. However, the European Commission has shown a sensible approach in waiving the rules for 2020 and possibly, for 2021. With blended resources also expected to be used for the first time, the union shown in the alliance of nations is a welcome and surprising characteristic of this mess.  
  2. There is what we can call "good" debt and "bad" debt. The significant increase in government debt levels due to crisis-related expenditure is sustainable, but only IF the funds are set towards productive uses. The actions of the E.C.B. have facilitated this. But it is not a cure. In the first instance, Draghi advises legislatures to protect the vulnerable to ensure social union. We have seen social division rise during this time, also causing major unrest. However, resources must be put to productive use and not wasted. In consequence of World War II, this took the form of a reconstruction of physical infrastructure throughout Europe. This time around, Mario Draghi advises that the investment should take the form of large-scale investment in human capital. Education is seen as a crucial part of the growth in productivity and economic growth. If economies are to prosper and the debt is to be paid back in the future, governments must have a revived focus on growing the productive potential of their economies. 

Want to see our trades live?

Join our premium trading community to:

  • See our top trade alerts from our analysts
  • Access our VIP chatrooms with traders worldwide
  • Access our training material exclusive to members
  • Exclusive access to articles

Looking for a Broker?

Check out our favorite brokers & reviews! Find brokers available in your country, or our top rated brokers to consider.
Find a Broker
More Articles
September 30, 2020
Strong Setups For This Week and Next

EUR/USD Short setup XAU/USD Short and long setup SPX500 Short setup EUR/USD EU did come up to resistance and is seeing some pressure, but it is now coming up for a retest. If price makes a higher high, the 200 SMA on 4H chart may be the next level of resistance. However, if the 4H […]

Read More
September 30, 2020
3 Books Every Aspiring Millionaire Must Read

3 Books Every Aspiring Millionaire Must Read Hi everyone! I see you're here because you want to develop your interest in personal finance and entrepreneurship. I'm TraderBart with A1 Trading, and I'll be talking about three books, which helped me build my millionaire mindset. Honorable Mention I wouldn't say this book deserves the Top 3 […]

Read More
September 26, 2020
Weekly Forex Forecast for GBPJPY, NZDJPY, XAUUSD, GBPUSD (27-02 October 2020)

Weekly Forex Forecast for GBPJPY, NZDJPY, XAUUSD, GBPUSD (27-02 October 2020) Hey everyone! Welcome to this weeks forex forecast for the week ending October 2nd, 2020. I'm TraderBart with A1 Trading, and this week I'll be looking at GBPJPY, NZDJPY, XAUUSD & GBPUSD. GBP/JPY Looking at the daily chart, we can see price has been […]

Read More

Related Articles

August 28, 2020
Economic stimulus and the Role of Central Banks

Politics preventing new financial stimulus The economic recovery in the major global economic powers depends on several important factors. One of the most vital part, the spread of the virus and the government's answers to it. With a decrease in daily cases of COVID-19 to 50,000 in the U.S.A. Yet U.S. A remains the most […]

Read More
August 26, 2020
How to Spot a Scammer

Our team has received many reports of scammers using our content and pretending to be us. Unfortunately, these accounts are difficult to shut down as there are many that we do not know of. While we will continue to do our best to get these accounts shut down as we receive reports, we are unable to […]

Read More
August 22, 2020
Legends of Investing - The Story of Warren Buffet

Warren Buffett is one of the most idolised, investors in the world. At the time of writing , his company, Berkshire Hathaway, has a market cap of $495 billion and Buffett himself has a net worth of $79 billion. His approach to value investing, combined with his influence over the companies he invests in , […]

Read More

A1 Trading Company

A1 Trading Company is a financial services and media business founded in Atlanta, USA.
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram