EPIC POLICY MISTAKES

Epic Policy Mistakes

The labor market is a central part of any economy. This is particularly true in consumer-led economies, such as the U.S. and Canada.

Today’s U.S. unemployment claims data was horrible. A record 3.3 million Americans filed a claim last week. The data in Canada also shattered records last week – with almost one million claims filed. Clearly millions of households have been directly impacted by this virus, with many of those living on the edge of survival.

The consequences of these effects remain incredibly unclear at the moment. Most strategists are sticking to a buy-the-dip strategy, having lost their clients a lot of money along the way down. But if the virus continues to weigh on growth (something that is very difficult to estimate), markets will fall lower.

Whereas if a vaccine is discovered and employed in the near future, the considerable stimulus in the system and the more attractive valuations will push risk assets higher – potentially by a lot, and fast. (Personally, I do not ascribe to this view and think continuing to be defensive is the best strategy).

So how does this all relate to the title of this article – “Epic Policy Mistakes”?

Well, given that there is massive uncertainty about how this crisis will unfold, I think it was very unwise and premature for central banks and governments to be so aggressive with their easing.

For instance, if the U.S. economy bounces back in six months and the virus becomes more history than present danger, then the recently agreed-on two trillion stimulus package will have either unleashed inflation and/or significantly increased the government’s debt burden.

By substantially increasing government spending and pushing debt burdens higher, the government has effectively constrained their ability to fight future crises and spend on future needs of the population. If the U.S. economy falls into another recession in two years, for example, then the U.S. government will find it much more difficult to save the private sector.

Furthermore, given that the U.S. population is getting older, the ability of the government to fund burgeoning healthcare expenditures in the coming decades will be much more constrained. So while these measures might be saving thousands of seniors today, they might also put millions of seniors at a greater risk in the future.

These are just some of the reasons why the government’s immediate sensitivity to the COVID-19 crisis could be a mistake. Perhaps a more appropriate approach would have been to gauge the impact of the virus, and then provide the relief gradually with clear signalling about how policy will evolve.

Monetary policy has also failed. Over the past decade, central banks expended much of their arsenal to combat lackluster growth and conspicuously absent inflation. Given the law of diminishing marginal returns (i.e., you get less benefit from additional units of support), future measures will be less impactful and less able to stymie future crises.

So by being so aggressive with their easing measures today, without having observed the impact of the virus, policymakers might have massively constrained their ability to deal with big problems in the future. Perhaps they should have been more patient with their measures.

By deploying copious amounts of stimulus without being able to estimate the depth and duration of this crisis, policymakers might have just made some epic policy mistakes.

#globalmacro