2020 has been the year that Modern Monetary Theory it was put into practice for the first time: governments issued as much public debt as they wanted and central banks bought it from them as needed.
In the case of the US, which is, as always, the one who sets the beat to which the rest of the world dances, these purchases amounted to 2.4 trillion dollars, with which the Federal Reserve almost fully financed the public deficit for the year. And, for now, without an iota of inflation.
Twelve years are those that supporters of the Quantitative Theory of Money have been waiting for price increases to get out of control because of the increasing the size of central bank balance sheets, without their forecasts having been fulfilled even by approximation. Will it continue to be so? Most likely, yes, at least for a time, given that the elements that give rise to the price increases (higher wages, higher prices of raw materials and increased bank credit) are still absent from the global scene.
That striking absence of the three elements that traditionally drove prices up may be striking, but it is not:
1) with globalization the bargaining power of the workers in the West collapsed, with which the spiral “price increase-wage increase-price increase” has been absent for at least twelve years;
2) since 2008 (or, perhaps more precisely, since 2011) the price of all the raw Materials most used has been in a long period of trend decline that is not over yet,
and 3) bank credit continues not to grow annually vigorously since the last financial crisis of 2008-2009. To the latter, it could be objected that in the middle of the pandemic there was a significant increase in credit and that this could be pointing to future inflationary trends.
Nothing is further from the truth, since the 30% annual increase in commercial and industrial credit in the US in May, when in February it was only 0.9%, was due to a defensive reaction of companies that, given the uncertainty created by the emergence of Covid-19, they decided, as a precaution, consuming their entire lines of credit, rather than running the risk of being left without treasury in the face of the unknown.
Once the worst is over, the waters are returning to their course and in November that annual increase was only 12%.
The elements that cause the price rises (wage rises, raw materials or increased bank credit) are still absent from the world panorama
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In the Eurozone there was also a significant increase in credit, although not of that magnitude: it went from 2.3% per year in February to 6.7% in May, and then fell slightly to 6.2%, according to the latest available data. . The reason for this difference in the way companies relax is the greater use they make in the USA of capital markets instead of bank credit.
So, as you can see, credit activity was quite feverish in the worst months of the pandemic, which coincided curiously with the months of greater falls in GDP both in the US and Europe: As said, for companies it was about surviving the chaos, ensuring that they were not strangled by lack of liquidity.
In the capital markets Activity has also been frantic, something that surprises in such a negative year, although the thing has no mystery: the low interest rates (close to or equal to zero) have led to the fact that everyone, companies and governments, have taken advantage to finance very cheap.
The corporate issues of bonds and obligations have reached globally the equivalent of 5 trillion dollars (which, together with the assurance of the IPOs and mergers and acquisitions) has allowed the business figures of investment banks have been astronomical: $ 125 billion in commissions, according to Refinitiv.
This atmosphere of credit and financial euphoria (which has also affected the stock markets, after their collapse in March) may come to an end, and abruptly, in 2021. Everything will depend on whether governments consider that “the financial grace measures” that they applied in the spring of 2020 they can be renewed or expire permanently. According to these measures loan delinquencies have been allowed that it would not be tolerated outside of the exceptional circumstances experienced in the year that has just ended.
The ECB has already warned that once the grace period has passed, euro zone banks will have to grapple with the fact that loans they have on their balance sheets totaling 1.4 trillion euros they will be affected by some type of delinquency, which could end up turning the health and economic crisis of 2020 into a new financial crisis.
The ECB has already warned that, once the grace period has passed, banks will find themselves with loans worth 1.4 trillion euros affected by bad debts
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The same happens in USA and ChinaIn the latter case, with its banks undermined by the loans forced by the government to non-performing projects that are unable to generate the resources with which to meet the payments and repayment terms of the loans.
Something that has already happened in the past on several occasions in China, where families have ended up assuming the losses caused by these loans through the so-called “Financial repression” (that is, by paying very low interest rates for your deposits in banks). It is not clear if this time the Chinese authorities will be able to repeat the play or if regional governments will have to take charge of bank losses.
With that background panorama of an eventual global banking crisis, which will or will not be the result of the governments’ decision to extend or not the grace period that postpones delinquency into the future, what can we expect from the markets in 2021?
The normal thing is that the upward trajectory of the bags, at least as long as central banks continue to inject liquidity into the financial system, something that, for the moment, seems guaranteed by what remains to be consumed from their announced bond purchase programs (both public and private).
As an orientation that this has been the case, suffice it to mention that since the middle of last March the US Stock Exchanges, represented by the index S&P 500, have risen 68% while the Federal Reserve balance increased 70%. And, in case this could seem something merely circumstantial and typical of 2020, it must be added that the same thing has happened since 2010: The 236% rise in the S&P 500 almost exactly coincides with the growth in the Fed’s balance sheet.
This upward trend in stock markets can be interrupted both by a loss of momentum in the force applied by the Fed and the ECB to their expansionary monetary policy and by some of the political events that tend to alter them (attentive to what happens in the future). US Congress on January 6) or due to the same doubts expressed above about the soundness of the banking system, giving rise to those temporary falls that can reach up to 15% or 20%.
Since 2010, it has been observed that the 236% rise in the S&P 500 coincides almost exactly with the growth of the Federal Reserve (Fed) balance sheet.
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Coinciding with moments of instability, and although within a tone of weakness, the dollar will regain some of its strength against the euro and the other currencies, having to be more pronounced in the case of the yuan renminbi that is reaching the levels that the authorities of the Chinese central bank usually consider as intolerable: around 6.3 yuan per dollar.
The profitability of public debt of the various countries will be contained by the policy of the central banks, although some of the temporary scares that inflation may cause will also be noticed with rising returns in the fixed income markets, and then things will return to their low course returns.
Why the passing inflation thing? For two main reasons: the pandemic has caused strong distortions in the international production chain, which has given and will continue to give rise to the fact that, at certain times, there may be temporary shortages of a product. Also, the fact that last April they came to see negative future prices for oil in the market will cause very strong annual increases in the price of energy in the spring of 2021.
Some raw materials, such as industrial metals, will follow the same path as stocks, although the sector as a whole will probably be weighed down by the price of oil. The price of gold still has a margin of rise of 14%, but surely you will only use it in the delicate moments.
And the bitcóin? It seems to be running the same bullish run as in the last quarter of 2017, which culminated in losses of 83% during 2018. However, if we apply the parallelism with that year, it still has a long way to go.
The year 2020 says goodbye with approval of vaccines and with the departure of the health minister with the best public spirit and worst performance that could be thought of. His opponents in Catalonia will have a very easy time drawing blood with the criticism they direct.
It is misunderstood that Pedro Sánchez impose in Catalonia to such a vulnerable candidate. Although it is worse understood that his adversaries reproach him for leaving the Ministry now, as in a praise, for passive, of his management … Things from the bedside book of contradictory automatisms that politicians have.
Until that rara reviews What is it Alejandro Fernandez (the only Spanish politician, so nice, who makes his opponents laugh when he attacks them, and who will be his opponent in the Catalan elections) has fallen into that vulgarity.
But… oops!… If we don’t talk about politics here… Only the health exception and its economic impact forces us to do so. In 2021 we will talk much more about China and international politics. May God catch us confessed!
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