Source: Wall Street News
After all, the long-term growth of the real economy cannot be driven by fiscal stimulus.
Deutsche Bank analyst Alan Ruskin pointed out in a report released on April 29 that after experiencing drastic fluctuations brought about by the pandemic, the US economy is rebalancing, which is beneficial to the prospects for risky assets.
The report thoroughly analyzes the changing trajectory of major US economic data under the impact of the pandemic. It was found that the increase in excess money supply has basically been passed on to rising prices. The cumulative increase of both has reached about 11-12% based on the pre-epidemic trend, and is currently showing a trend of convergence. Although fiscal stimulus has boosted nominal GDP growth, the real driving effect on the real economy is limited.
The cumulative scale of multiple fiscal stimulus policies exceeds that of any period other than wartime
Analysts pointed out that the US government's large-scale fiscal subsidies during the epidemic exceeded the cumulative scale of any period other than World War II.
Even the Roosevelt New Deal after the Great Depression of the 1930s pales in comparison to the Biden administration's fiscal stimulus. According to a 2015 study by the economics community, the total cost of the Roosevelt New Deal was 41.7 billion US dollars, equivalent to today's 789 billion US dollars, or about 40% of the Biden administration's fiscal stimulus.
This insane liquidity investment, which can be called “helicopter throwing money,” has kept Americans' savings levels high until today, and extended the impact of fiscal stimulus for at least 3 years.
In order to clarify the chaos caused by the pandemic, the report attempted to trace the extent to which various economic variables deviated from the trend line before and after the pandemic. The results found that:
The US M1 money supply (currency in circulation plus current accounts) increased by 43% compared to the pre-pandemic trend line, the total assets of the Federal Reserve increased by 40%, and the S&P 500 index rose 26%.
Analysts pointed out that due to the lagging nature of inflation, the cumulative increase in M2 was 15% higher than the CPI trend line, but inflation has caught up, and the excess money supply growth has basically been passed on to price increases. Both have shown a cumulative increase of 11-12% based on the pre-pandemic trend, and are currently showing a trend of convergence.
He wrote:
This discovery is in line with monetarist theory, showing that the surge in money supply caused by the Federal Reserve and fiscal authorities' unconventional monetary policies and large-scale fiscal stimulus policies has now been largely digested through price increases.
Banknote printing has limited impact on the real economy in the long run
Analysts also stressed that although the US government injects liquidity into the market by “throwing money by helicopter,” the actual driving effect on the economy is limited.
On a nominal level, the growth rate of indicators such as nominal GDP, retail sales, and corporate profits is in line with the cumulative growth of M2 money supply. However, some key real economy data, such as non-farm payrolls, housing investment, job vacancies, etc., showed even negative growth compared to pre-pandemic trend lines.
However, the data also shows that the US real economy has basically escaped the impact of the epidemic and has begun to return to normal.
The analyst wrote:
Although currency investment can boost nominal economic data in the short term, it has limited impact on the real economy in the long run. This means that inflationary pressure gradually subsides as the money supply gradually shrinks.
In terms of asset prices, Deutsche Bank pointed out that the performance of real estate and stock markets was divided. The cumulative increase in housing prices was roughly comparable to M2 growth, but the increase in the S&P 500 index was significantly higher than M2, reflecting that there is still room for growth in its price-earnings ratio in the medium term.
Overall, Deutsche Bank believes that the US economy is being rebalanced, fiscal stimulus effects will gradually subside, and inflationary pressure will ease accordingly, which is beneficial to the prospects of US and global risk assets.
edit/lambor