USA to introduce $2 trillion economic stimulus. What’s next?


Dear friends,

We are living in interesting times, indeed.  The events affecting the whole world happen almost every day.

Yesterday, the US Senate approved an economic stimulus worth $2 trillion!

Let’s find out what it means to us and what consequences it will have.

First, let’s see what is included in these $2 trillion. To be honest, I haven’t found an official bill while mass media provide different numbers, but in general, the package looks like the following:

$500 billion – direct support of big corporations whose staff is more than 10,000 people. These are direct and non-repayable loans granted on the condition that companies don’t dismiss employees.

$367 billion – tax holidays and loans/grants for small businesses

$250 billion – tax holidays and extra benefits for individuals

$250 billion – higher unemployment benefits, direct payments to low-income groups (with the annual income less than $75,000) and extra payments to large families per each child.

$117 billion – for public health system (hospitals and medical staff)

$10 billion – for other targeted payments (support for states and municipalities, evacuation of citizens, provision of food during self-isolation and quarantine, supplies for the National Guard and volunteers, maintenance of art objects).

As we see, the total volume of financial aid is actually less than $1.5 trillion, but some economists estimate that the economic effect of these measures will be around $2-2.2 trillion, owing to soft loans and the credit multiplier.  So, the leading mass media took up the figure of $2 trillion and are spreading it around.

Interestingly, the draft version of the economic stimulus package stipulated confidentiality of the information concerning the distribution of benefits among big corporations, which would have been favourable to corruption and embezzlement, but the Senate removed those stipulations.

Analysing the package, I need to mention the following:

Firstly

This package is mainly of social nature and directed at supporting the unemployed and low-income people. Obviously, these are populist measures as the US presidential election is to take place in November 2020 and Trump wants to keep his seat.

Secondly

This money won’t fall from the skies and it will affect, directly or indirectly, the size of the US national debt and the confidence in the dollar as an international means of payment. The global economy will probably absorb this money emission now, when deflationary processes are developing and the demand for stable assets, such as US bonds, is growing. Still, in the long term, this situation will speed up the process of debt bubble bursting and will finally lead to a more severe debt crisis.

Thirdly

The nature of the current crisis is much different from that of the mortgage crisis of 2008. That crisis was purely financial and the source of its development was inside the USA while the current crisis has been imported from the outside and caused not only by the pandemic, but also by the destruction of financial, logistic and transactional chains worldwide. Despite being one of the most important forces of the global economy, the US economy won’t curb the global crisis using this stimulus package since its sources are biosocial and not economic. In other words, even this huge stimulus won’t be enough if other economies get into a deep crisis.

Fourthly

This stimulus is aimed solely at stimulating demand, but it doesn’t solve the problem of supply crisis caused by breaks in logistic and production chains. As a result, these measures might give rise to a commonplace deficit of goods and inflationary growth in the short term, which is harmful to the economy in general and decreases the effects of financial aid.

What will be positive effects of this package?

Obviously, the short-term positive effect of this package will allow the US economy to “breathe out” a bit and not to fall into an uncontrolled spin.  However, these measures aren’t a cure for the global crisis. They can only cut off the local symptoms of the US economy. If the threat of a global pandemic isn’t neutralized in the nearest future, these $2 trillion will be diluted very fast in the global crisis of quarantines, lockdowns, closed borders and shutdowns.

The activation of the printing press and sharp growth of the US debt will finally boomerang against both the USA and the whole world.

The stock market’s participants seem to perfectly understand that.

https://www.tradingview.com/x/izoMTckF/

Please have a look at the H4 time frame of S&P500 in the chart above. We see that the factor of growth amidst the examination of stimulus measures has quickly exhausted itself and the euphoria hasn’t been long. Consolidation is developing within a bearish channel, which means the downtrend is likely to continue.

https://www.tradingview.com/x/mkcfDzhv/

The growth of gold, a traditional safe-haven asset, confirms the market sentiment.  The main peak of the bullish movement coincides with the time the Senate was examining the economic stimulus package, which is an indirect sign of the market’s discontent with these measures, and of the continuing general trend towards an escape from risks.

https://www.tradingview.com/x/gdabkjxX/

Based on the global wave structure of supercycles (see the chart above), the bullish trend in gold will be relevant in the long term, and we may see the price of $2000 and more. On the whole, this picture supplements the general puzzle of the long economic crisis and the fall of the USD’s purchasing power for the next few years.

Check my next articles for a more detailed forecast for gold and other assets.

Take care of yourself and your money!

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I’d like to remind you that all the materials are provided for educational purposes only. They aren’t financial advice and don’t guarantee any profits. All trading decisions you make are your responsibility only.

Best regards,

Michael @Hypov

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