The seriousness of the economic crisis now facing the international economy was neatly demonstrated by the Australian Stock Exchange yesterday.
Scott Morrison announced his government’s substantial stimulus package at 10.30am, and what had been a falling market stabilised. Here was some economic leadership at last from a government that has point blank refused to lead at all since Morrison became prime minister.
Then Donald Trump commenced his evening address to Americans at 12 noon Australian time, and a market that had begun to recover fell off a cliff, losing 400 points over the next hour, ending the day down 7.4%. Overnight, it fell another 384 points on the futures market.
Trump’s European travel ban — allegedly on the basis that Europe had been “seeding” infection clusters in the United States — was bad enough. The fact that Trump so badly botched his description of it that he appeared to say all trade from Europe would be blocked as well, made it even worse, until the sexual-predator-in-chief corrected himself in a tweet.
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But it was the lack of any substantial stimulus package that signaled the US and global economies are facing deep trouble.
Australia has embraced stimulus. The Johnson government in the UK has embraced stimulus — it’s promised £12 billion for coronavirus-related stimulus on top of the £18 billion it was going to pump in anyway. The European Central Bank, which since 2016 has had an interest rate of 0%, announced it would buy €120 billion in bonds. Markets are expecting a stimulus package in China running into the hundreds of billions of dollars.
But in the US? Trump announced a US$50 billion loan program for small business, subject to congressional approval, and will instruct Treasury to defer $200 billion worth of tax payments. But that was it.
Trump wants payroll tax relief — that rare thing, a good Trump idea — but needs Congress to back that. Both Democrats and Republicans are making similar noises about the need for stimulus, but getting them to agree to a major package will be like herding cats. The Democrats have prepared a package of measures but we’re yet to see if the GOP will back it and Trump will sign it.
That leaves the Federal Reserve as the only confirmed source of major stimulus in the world’s biggest economy. After cutting rates by 0.5 points last week, the Fed stepped in again early this morning with US$1.5 trillion in short term funding to stop money markets freezing — giving us a replay of late 2008 and the credit crunch that pushed the globe into the depths of the global financial crisis.
We’ll find out tonight if that’s going to do anything to stabilise markets, after Wall Street went into a tailspin overnight and fell 10%, its worst day since the 1987 crash. European markets lost even more, with the FTSE down nearly 11%.
No one has much confidence that the Trump administration has what it takes to deal with the crisis. Dubya had Hank Paulson, who turned out to be invaluable in dealing with the financial dimensions of banking crisis in 2008; Trump has Steve Mnuchin, who, like the rest of the administration, only looks good because of how embarrassing his boss is. At a time when clear communication is crucial to calming both public health fears and investors’ financial terror, Trump can’t even read an autocue without accidentally announcing a trade blockade of Europe.
In the real world, Americans were facing up to the suspension of the $8 billion a year NBA and the National Hockey League, the cancellation of the biggest competition in the US, the “March Madness” basketball tournaments between American colleges and universities, the closure of Disneyland, a delay of at least two weeks in the start of the baseball season and the cancellation of spring training baseball matches, the shutdown of Broadway and the country’s favourite actor announcing he has the virus.
No iconic recreation may prove immune. States are shuttering schools for two weeks and declaring states of emergency. Each of these will foster deep concerns within Americans and feed into a hitherto buoyant economy, pumped up by Trump’s colossal deficit spending.
The other real economic impact to watch is companies will high levels of debt, the product of a decade of low interest rates and a world awash with money looking for opportunities to invest.
As the Financial Times pointed out, this time around ratings agencies are proactively calling out risks, rather than conspiring with companies and banks to hide it, and not just for the obvious candidates like travel and entertainment companies. Banks, in turn, are turning off credit, especially for smaller companies, which will push many of them to the wall.
For three years US companies have ignored Donald Trump’s incompetence, incoherence and maliciousness, and enjoyed his reckless deficit spending via lower company taxes. Now the bill may be about to fall due.
A disaster is at hand, and the last man on earth you’d want in charge is in the White House.