Are You Feeling Stimulated Yet?
The “stimulus” bidding war we’ve been expected is here. Now with bond yields backing up, there is a question of how we are going to pay for it. But yields are still crazy-low by historical standards. The back-up was expected, and is a good sign that growth expectations are at least slightly improving. Financed in part by the Fed’s new QE, US stimulus could be seen as an inflationary experiment with Modern Monetary Policy. But the same charge could have been made in 2008-2009, and if anything inflation has been too low since then. The real issue is the substance of the stimulus. Providing “bridge loans” to firms is key, as well as creating incentives for worker retention and eventual rehiring. With oil making new lows, leveraged US frackers will face the financing squeeze we predicted. The Fed’s new commercial paper facility should help as will Trump’s idea of refilling the SPR. But only production cuts by Saudi and Russia can durably raise prices.