Fiscal Policy will now take centre stage as France has shown

One of our themes is now fully in play. We have observed over the past year or two a shift in establishment thinking towards fiscal policy. This had both bad and good elements. The bad was that it reflected a reality where all the extraordinary monetary policies had proved to be much weaker than the the claims of their supporters and even worse for them were running out of road. The current crisis has reminded us of this as we have had, for example, two emergency moves from the US Federal Reserve already, in its role as a de facto world central bank.

A more positive factor in this has been the change we have been observing in bond yields. We can get a handle on this by looking back at the world’s biggest which is the US Treasury Bond market. Back in the autumn of 2018 when worlds like “normalisation” ans phrases like “Quantitative Tightening” were in vogue the benchmark ten year yield saw peaks around 3.15%. Basically it then spent most of a year halving before rallying back to 1.9% at the end of last year and beginning of this. But this move took place in spite of the fact that we have the Trump Tax Boost which was estimated to have an impact of the order of one trillion US Dollars. I mention this because as well as the obvious another theme was in play which was that the Ivory Towers were wrong-footed yet again. The Congressional Budget Office has had to keep reducing its estimate of debt costs as the rises it expected turned into falls. Also whilst I am on this subject I am not sure this from January is going to turn out so well!

In 2020, inflation-adjusted GDP is projected to grow by 2.2 percent, largely because
of continued strength in consumer spending and a rebound in business fixed investment. Output is
projected to be higher than the economy’s maximum sustainable output this year to a greater degree
than it has been in recent years, leading to higher inflation and interest rates after a period in which
both were low, on average.

Best of luck with that.

Meanwhile we have seen a fair bit of volatility in bond yields but the US ten-year is 0.8% as I type this. Even the long bond ( 30 years) is a relatively mere 1.4%.

Thus borrowing is very cheap and only on Sunday night the US Federal Reserve arrived in town and did its best to keep it so.

 over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

Step Forwards France

There was an announcement yesterday evening by President Macron which was announced in gushing terms by Faisal Islam of the BBC.

The €300 billion euro fiscal support package announced by Macron for the French economy, to ensure businesses dont go bust and taxes/ charges suspended, is worth about 12% of its GDP – in UK terms that would mean £265 billion…

This morning the French Finance Minster has given some different numbers.

French measures to help companies and employees weather the coronavirus storm will be worth some €45bn, the country’s finance minister Bruno Le Maire said on Tuesday. ( Financial Times)

He went on to give some details of how it would be spent.

He told RTL radio the package of financial aid, which includes payments to temporarily redundant workers and deferments of tax and social security bills, would help “the economy to restart once the corona virus epidemic is behind us”. Previously he had referred to “tens of billions of euros”.

Now let us look at the previous position for France. We had previously note that France was in the middle of a fiscal nudge anyway as the first half of 2019 saw quarterly deficits of 3.2% and 3.1% of GDP respectively, The third quarter was back within the Maastricht rules as it fell to 2.5% of GDP but we still had a boost overall and as you can see below the national debt to GDP ratio went over 100%

At the end of Q3 2019, Maastricht’s debt reached €2,415.1 billion, up €39.6 billion in comparison to Q2 2019. It accounted for 100.4% of gross domestic product (GDP), 0.9 points higher than last quarter. Net public debt increased more moderately (€+15.0 billion) and accounted for 90.3 % of GDP.

Of course debt to GDP numbers have gone out of fashion partly because the “bond vigilantes” so rarely turn up these days. There was a time that a debt to GDP ratio above 100% would have them flying in but they restricted their flying well before the Corona Virus made such a move fashionable. The French ten-year yield is up this morning but at 0.27% is hardly a deterrent in itself to more fiscal action. However whilst it is still as low as it has ever been before this stage of the crisis a thirty-year yield of 0.8% is up a fair bit on the 0.2% we saw only last week. Another factor in play is this.

Third, we decided to add a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes. ( ECB )

Whilst only a proportion of the buying we can expect monthly purchases of French government bonds to rise from the previous 4 billion Euros or so and accordingly the total to push on from 434.4 billion. Also whilst President Lagarde was willing to express a haughty disdain for “bond spreads” I suspect the former French Finance Minister would be charging to the rescue of France if necessary.

One feature of French life is that taxes are relatively high.

The tax-to-GDP ratio varies significantly between Member States, with the highest share of taxes and social
contributions in percentage of GDP in 2018 being recorded in France (48.4%), Belgium (47.2%) and Denmark
(45.9%), followed by Sweden (44.4%), Austria (42.8%), Finland (42.4%) and Italy (42.0%). ( Eurostat )

Short Selling Bans

France along with some other European nations announced short-selling bans this morning which stop investors selling shares they do not own.

#BREAKING French market regulator bans short-selling on 92 stocks: statement ( @afp )

I pointed out that these things have a track record of failure

These sort of things cause a market rally in the short-term but usually wear off in a day or two.

The initial rally to over 4000 on the CAC 40 index soon wore off and we are now unchanged on the day having at one point being 100 points off. Of course some policy work will be writing a paper reminding us of the counterfactual.

Comment

I am expecting a lot more fiscal action in the next few days. The French template is for a move a bit less than 2% of GDP. That will of course rise as GDP falls.

The French government was assuming the economy would shrink about 1 per cent this year, instead of growing more than 1 per cent as previously predicted, Mr Le Maire said. ( Financial Times)

Frankly that looks very optimistic right now. The situation is fast moving as doe example Airbus which only yesterday expected to remain open announced this today.

Following the implementation of new measures in France and Spain to contain the COVID-19 pandemic, Airbus has decided to temporarily pause production and assembly activities at its French and Spanish sites across the Company for the next four days. This will allow sufficient time to implement stringent health and safety conditions in terms of hygiene, cleaning and self-distancing, while improving the efficiency of operations under the new working conditions.

Let me now shift to the other part of the package.

Mr Le Maire said ammunition to prop up the economy also included €300bn of French state guarantees for bank loans to businesses and €1tn of such guarantees from European institutions. ( FT )

The problem is how will this work in practice? The numbers sound grand but for example the Bank of England announced up to £290 billion for SMEs only last week which everyone seems to have forgotten already! One bit that seemed rather devoid of reality to me at the time was this.

The release of the countercyclical capital buffer will support up to £190bn of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Returning to pure fiscal policy I am expecting more of it and would suggest it is aimed at two areas.

  1. Supporting individuals who through not fault of their own have seen incomes plunge and maybe disappear.
  2. Similar for small businesses and indeed larger ones which are considered vital.

Just for clarity that does not mean for banks and the housing market where such monies have a habit of ending up.

Meanwhile a country which badly needs help is still suffering from the “ECB not here to close bond spreads” of Christine Lagarde last week as its ten-year yield has risen to 2.3%. Her open mouth operation has undone a lot of ECB buying.

34 thoughts on “Fiscal Policy will now take centre stage as France has shown

  1. Great article as always Shaun.

    Governments around the world are going to have to engage in massive QE programs (again).

    But where will the helicpoter money head to. Will it be the people or the businesses. Will it be unfortunate people who have been made redundant? Or the airlines who have used their spare cash over the last ten years to buy back shares.

    Already pubs, restaurants, retail, airlines have got their hands extended for more cash. The car industry was on its knees before covid19, and now they’re stopping production. so i assume they’ll be asking for cash soon. And then they’ll ask for more cash to fund the transition to low margin electric cars. Zombie companies are finally starting to go under.

    I wish everyone well, but I’ve been following Dr John Campbell for the past few months. And unfortunately, his predictions are turned out right.

    good luck everyone.

    • Hi Anteos

      The credit crunch era has taught us that the establishment love to claim their latest move will work but that reality is much less kind. Today has seen a barrage of loan and fiscal promises from the UK, US and Spain. We await to see how and if they work, but we do know that the US ten-year yield has risen to 1.08%. So as you say we can expect even more QE

  2. UK Chancellor is to advise on further measures today, the Airline industry want help. This could be the time to reduce UK interest rates to zero rather than waiting while the end of the month.

    Whether business should be propped up is a controversial subject, many businesses will hit trouble and I wouldn’t have though every business will get help.

    As an example will Taxi drivers get help who have relied on taxi fares from airports?

    But whatever the UK government or any other government do to get through this crisis, its going to have to be paid back over many years and the younger generation pay for it.

    There is no magic money tree any measures most governments will have to implement will all have to be paid back at some stage.

    I don’t accept when this crisis is over things will revert to previous lifestyles its just not possible.

    • Hi Peter

      A lot depends on how the Corona Virus pandemic plays out. Will it continue to build or will it fade? Also how long will it last? We simply do not know.

      I too fear for the little man and woman and I mean in a business sense.

  3. Yes, were going to have both fiscal and monetary stimuli, Mitt Romney is trying to get legislation passed to give every American $1-10,000, of course this would be only TEMPORARY, and of course once prices rose to reflect all this new buying power of consumers, the next check would have to be many times bigger, and so on, until the currency is worthless. Over here, the Bank of England the Serie A champions of champions of devaluing currency, need only to raise a cultured eyebrow or a scratch of the nose to give the signal the £ is going lower, and in the last month have presided over a near 10% drop in value against the Euro. This is a currency that should reflect all the troubles of not only France as described above by Shaun, but also Italy( Corona central) that has virtually shut down its economy and all the rest of Europe and yet the Euro is up 10% in a month against the £.How can this be???It is as if only the UK were affected and the EU has a Starship Enterprise style cloaking device that is covering the entire continent and excluding the virus!!!

    Stealth devaluation by the Bank of England???No surely not ?The BBC would have reported it!

    They’re not even trying yet folks, and of course this all passes the mainstream media by completely, they are too busy reporting that house prices are still reaching new highs!!!

    Barclays, if it closes lower today must make some sort of record, making it 18 consecutive down days!!!! And a 56% fall from the December highs, perhaps the stinky stuff hidden off balance sheet is beginning to worry a few larger investors and is getting too difficult to hide?

    I’m calling it a buy here at 84p!!!!

    • Hi Kevin

      I think the Euro has been distorted by Carry Trade reversals through this phase as people have panicked out of the trade by buying Euros. I notice that pattern changed a bit today as at times it fell more than the £ against what is presently the King Dollar.

      When the credit crunch hit I knew someone who was long Barclays shares. Later when it went above £3 I said get out and I am glad I did. We are basically back to the lows again.

  4. Hello Shaun,

    re : Fiscal Policy will now take centre stage as France has shown

    yup, but it will make little difference , will it ?

    panic – we’re on the verge of hysteria if the super markets were any guide this morning – looked like a plague of locusts had descended on the place – next we;ll get some bright spark who will suggest closing them ” for re-stocking” …….

    well no amount of “free” money will alleviate that kind of mentality

    still , got some popcorn ? self isolate and watch the show, we’ve all got a front seat on this one !

    Forbin

    • Hi Forbin,
      Know what you mean, been trying to buy soap for three weeks now, sold out everywhere, but this is before it has really taken off, and any way, how are you supposed to self isolate when you cannot possibly buy enough basics to keep you going for those two weeks because the shelves are empty!

      To understand the mentality of the average Brit you only have to see how they strip the shelves bare on Xmas Eve for a one day closure of shops over the Xmas holiday, now factor in the likely disruption from Corona, and they will ramp their buying up b a factor of 10. It is going to be like war time rationing for the foreseeable future IMHO, just get what you can when you can, if that means baked beans with spam and next day porridge and spam so be it.

      • Up until yesterday, the level of panic buying locally has been quite muted and most things were available or were only temporarily out of stock. Today it is like a plague of locusts have been through the place. People queuing for up to an hour just to pay for stuff! If the government wanted to avoid panic buying then their announcements yesterday were guaranteed to cause it. My daughters online business fell off a cliff within a couple of hours of their new guidelines being put out. No sales at all today.
        At some point folks store cupboards will be rammed full and hopefully then things will quieten down. You cant panic buy for weeks on end – where will you put it all? It all depends on how supermarkets and manufacturers handle the flow of goods. If they are able to replenish then confidence will return and panic subside.

  5. What’s the point of helicopter money if we cannot spend it?
    I think this may be the point where housing wealth is deliberately collapsed with hyper-inflation.

    • Yes but the price doesn’t go down just the price of everything else goes up so an egg costs £10 but they can still say you never lose money with property, and most of the UK electorate would consider they came out of this crisis OK and thinking themselves clever!

      • well if they can keep house prices sky high , this will save the TBTF Banks and they are the economy , don’t cha know ?? 😉

        Banks Saved !! job;s a good ‘un !

        Forbin

    • Interesting approach from Kielder Observatory, who were going to run an event with Chris Lintott from The Sky at Night. They suggest you swap the ticket for a voucher to come to an event in the next twelve months. They keep the cash to keep themselves going and you will be coming back later when the headless chickens have given up.

  6. I had hoped that Madam Lagarde’s massive FIMO (Foot in Mouth Operations) last week might have been a quick spike but the spreads are looking quite threatening. Italy is going to bear the brunt and in any fair society she would have been sent off down the road with her ears ringing. Such is the democratic deficit in the Eurozone.

    • Hi Andy Z

      I am afraid that these days the higher in the bureaucracy you are the less you are ever held responsible for anything. An equivalent faux pas lower down the ranks would be dealt with much more harshly. If US bond yields remain up here then Italy looks set to suffer again tomorrow.

  7. The release of the countercyclical capital buffer will support up to £190bn of bank lending to businesses….

    but businesses need revenue ! ie paying customers !

    if customers all stay at home how can you ….. oh never mind, so long as Banks and houses are ok , I get it ….

    Forbin

  8. Just a small point Shaun, France Tax as opposed to Social Charges are relatively light compared to say UK. Its the SCs which reflect the ‘social charter’ between people and state that are high.
    Anyway back from sunny, hot , free and easy Thailand ( even with a military junta) to depressed, locked down France. Where from midday I need an ‘attestation’ completed , signed and dated to leave the house. I think the last time this happened was during a real war 80 years ago.
    South Korea is the shining example of how to deal with the virus, yet no-one follows their example. But at least the US CDC has now recognised that the SK results of using a very cheap, very available drug really does deal with the infection in most cases. Chloroquine. Even in France the Marseilles CMO at the University Hospital is shouting to anyone listening that it works. Hey but its so much more fun to impose fascist type constraints on civil life and vote yourself powers that you will never give up.
    Clearly someone somewhere thought ‘climate change’ was just not cutting the mustard, we needed something a lot quicker to change the shape of society.

    • Hi JimW

      The issue over taxes and social security payments is a complex one, just look at National Insurance in the UK which is badged as the latter but is really just another tax. I took the Eurostat numbers so perhaps they just put everything in the pot.

      As Kevin has replied below I understand Chloroquine is used for malaria but can add that it can have serious side-effects for some.

      Where do you get the “attestation” papers from?

      • From the Gov website, you print them off , complete, and present them to gendarmes positioned on roads and pathways.
        Chloroquine has been around since the mid-40s. It is usually plentiful and cheap. However if you try to get some in the UK now you will find you can’t, all stocks have been requisitioned by the Govt. On Feb 26 the UK banned all export of the drug. This was just after S. Korea announced the successful use of it in hundreds of covid-19 cases.
        As I mentioned US CDC has now confirmed the S. Korea experience.
        The French are starting to use it under the brand Plaqueril in their covid-19 cases.
        Unlike other possible remedies trialed, chloroquine works on extreme cases as well as mild ones. Although its widely used for malaria it has also been used for other illnesses such as HIV and autoimmune diseases.

  9. Predictably they’ve chosen to give the money to businesses. 33o billion and grants that will not need to be paid back. The holy mortgage owner will get a 3 month holiday, but nothing for renters?

    • Mortgagors who are “in financial difficulty due to the virus” or should we dispense with the lies and say “in financial difficulties”. That forecast of arrears, repos and falling prices must be bad!

  10. Hi Shaun
    With the initial 330bn support (with strings attached)
    and probably much more to come TPTB will finally
    get the inflation they have craved. What happens
    to interest rates with hyper inflation because the
    precious must be supported ?
    My wife and I are already confined to barracks.so
    we will watch what happens without popcorn,pasta
    and bog rolls:o)
    JRH

  11. Today the UK chancellor has taken more fiscal measures.

    However many of the fiscal measures are loans!!!!

    Mortgages lenders to allow 3 months mortgage holiday but all that will do is extend the loan.

    There are some grants of £10,000 for some small business but the fine print wants looking at.

    My feeling is most the fiscal help are probably loans, they are not as yet dropping money in a parachute.

    There are going to be more business rates exemptions but I feel they wont be enough. There will be no one going into bars and restaurants there will be no sales and no sales means no profits.

    What else may happen soon is another rate cut to 0.10% :

    https://www.propertywire.com/news/us-and-canada-cut-interest-rates-again-the-uk-may-follow

    To put things in context Mountain Warehouse which has been a profitable company for many years saw its sales collapse 50% last week and there are 2,000 jobs at risk.

    https://www.retail-week.com/sports-and-leisure/mountain-warehouse-boss-mulls-2000-redundancies-amid-coronavirus-sales-slump/7034392.article?authent=1

    Overview and conclusion:

    Whether it bee France, Italy, the UK and the US a recession is on its way and when the disease is out of the way the economies will take years to fully bounce back.

  12. The real data on the housing market must be pretty bad, if it has come to the Yanks being about to issue helicopter money, once again forgetting the fundamentals of economics – like who is going to spend if you are not allowed out? The marginal propensity to save is always there, but in a climate of fear, it will be much higher. However, if you are selling your house to a young couple, it is just like all those other wheezes – look you have some cash, so I will put my asset price up.

    Of course, these clowns have forgotten basic economic lessons in the past – bin Laden said he would destroy the West economically. Oh how the Yanks celebrated when they killed him – but he is having the last laugh now. Rates were cut in the wake of the 2001 attacks when it was wholly unnecessary and after a hiatus since the late 80s, politicians discovered that they could buy popularity with a fake boom, where everyone could make money for doing nothing by buying a pile of bricks. As the bubble inflated, the voices said “put up rates”, but the CBs and the politicians would not listen – until it was too late. What did they do? Print money and slash rates below the liquidity trap level – up went house prices and, oh, given that our output was being sucked into housing and other assets, there was no real growth, just what they could fake with immigrants. So, instead of a bust and the recovery starting about three years out from the bottom, we have had ten years of stagnation. It has taken a heavy cold to collapse the edifice as the weak, which should have collapsed years ago, finally do (or don’t as the taps are randomly turned on).

    We are going to see a bad downturn, but no-one will take blame as the virus becomes the cover. As I mentioned last week, we are are in DonMcLean’s Vincent:
    “They did not listen, they did not know how
    Perhaps they’ll listen now”.

    • Hi Dave

      I think Kevin has replied to you so here it is.

      “Dave, as you say the US wanted to blame Bin laden for 9/11 and the recession after the dotcom bust, but it never is the fault of the Fed is it? The Fed that stoked the dotcom bubble by hosing markets with money after LTCM blew up in 1998, then they blew another bubble in 06/07 with massive fraud linked to mortgage finance and derivatives, that too was bailed out, and now we have had Putin blamed for rigging the election that delivered Trump to the Oval office, Putin and the Chinese have been demonised and blamed for everything wrong in modern America, but Putin/Russia and the Chinese don’t need to try to destroy the USA because they will do it to themselves courtesy of the operations of the Fed, they will destroy themselves financially, the day they passed the Federal Reserve into law in 1913 it was all over, they have rendered the most powerful productive country in the world into a bloated financially bankrupt bully that is desperately trying to hang on to its former power and influence by threatening and attacking any country that does not do as it is told.A country that was once a manufacturing powerhouse has now been reduced to one that uses the power of its currency that is backed by nothing more than the might of its armed forces, to control the world. A currency that is backed by nothing but threats and blackmail and no longer represents anything other than a digit on a keyboard produced in China.The role of the Fed to day is repeatedly creating ever larger bubbles, and when they inevitably burst, flooding the system with digital money to reflate the next one.

      Let’s see if they can produce another one out of this mess.

  13. Dave, as you say the US wanted to blame Bin laden for 9/11 and the recession after the dotcom bust, but it never is the fault of the Fed is it? The Fed that stoked the dotcom bubble by hosing markets with money after LTCM blew up in 1998, then they blew another bubble in 06/07 with massive fraud linked to mortgage finance and derivatives, that too was bailed out, and now we have had Putin blamed for rigging the election that delivered Trump to the Oval office, Putin and the Chinese have been demonised and blamed for everything wrong in modern America, but Putin/Russia and the Chinese don’t need to try to destroy the USA because they will do it to themselves courtesy of the operations of the Fed, they will destroy themselves financially, the day they passed the Federal Reserve into law in 1913 it was all over, they have rendered the most powerful productive country in the world into a bloated financially bankrupt bully that is desperately trying to hang on to its former power and influence by threatening and attacking any country that does not do as it is told.A country that was once a manufacturing powerhouse has now been reduced to one that uses the power of its currency that is backed by nothing more than the might of its armed forces, to control the world. A currency that is backed by nothing but threats and blackmail and no longer represents anything other than a digit on a keyboard produced in China.The role of the Fed to day is repeatedly creating ever larger bubbles, and when they inevitably burst, flooding the system with digital money to reflate the next one.

    Let’s see if they can produce another one out of this mess.

    • Clue in there about paying the rent and finding ways to spend money without going outside.
      I shall stock up on custard slices – then if the latest plague gets me, I can die happy.

      Ancestors made a few quid out of property law after the Black Death.

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