Morning Commentary: Pay Now or Pay More Later

Foreign Exchange - Morning Commentary
Pay Now or Pay More Later
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
This past week, a record 3.28 million people filed for jobless benefits in the US.  This was an increase of 3 million filings over last week’s total.  For scale, the prior record high was 695,000 jobless claims in October 1982.  Clearly, the economic costs are mounting and these stark economic realities have led some government leaders to question whether or not social distancing is worth the economic costs.

In my view, reversing social distancing control measures before the virus is clearly under control would be a grave mistake and could mean an even deeper and longer recession.  There is an overwhelming library of epidemiological studies that show that the outbreak would spiral out of control and overwhelm the medical system without a strong “identify and quarantine” system (Korea) or strong social distancing program (China).

Even in the hypothetical situation where the national government lifts the current social distancing measures but the hot spot cities maintain them, studies still show an inevitable escalation in cases.  This would ultimately lead to more draconian measures than originally imposed, higher peak cases and a deeper recession.

Look no further than the UK and Italy for relevant case studies.  The UK initially thought of using “herd immunity” where you let the virus run its course and allow people to develop natural immunities.  For Italy’s part, it initially tried to downplay the virus.  In the end, both countries have had to reverse course.

There really is no sugar coating it as there are no good choices.  You either pay now or pay much more later.   
  • The US Senate voted to pass its $2 trillion stimulus package in a 96-0 vote.  The House should vote on the bill this Friday.  For scale, $2 trillion amounts to roughly 50% of what the Federal government spent all of last year ($4.4 trillion).    
  • The ECB removed restrictions on the sovereign debt it can purchase under its emergency program.  Prior, the self-imposed limits only allowed the ECB to buy a third of each member states’ debt.  Italian, Spanish and Portuguese bonds should be the biggest beneficiaries.  This action as well as other steps have supported the euro as evidence builds for a more coordinated response to the COVID-19 crisis.
  • German legislation to fight the COVID-19 outbreak is also making its way through Germany’s legislature.  The lower house approved the bill on Wednesday with the upper house scheduled to vote on it Friday. 
  • Singapore, Korea and India all announced additional stimulus measures.  Singapore announced $33 billion in stimulus, Korea announced repo operations to provide unlimited stimulus, and India announced $22.6 billion in stimulus measures. 
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