Want to read more by Russell Investments? Visit their Featured Firm page here
Over the course of the Covid-19 outbreak, and particularly in the last two weeks, the daily blog posts that Paul Eitelman and I have written have focused on the U.S. and the efforts of U.S. policy makers.
Why have we concentrated so much on the U.S.? It’s because of our belief that massive U.S. policy response is needed to ensure that the global downturn we’re experiencing does not turn into a permanent impairment to the global economy.Some of that perspective is informed by the fact that the U.S. economy is the largest in the world, and that as a country, the U.S. consistently runs a trade deficit. Put another way, America is a very large customer in the global economy, which means that permanent demand destruction in the U.S. has large impacts across the world.
Most of our focus on the U.S., however, is due to the fact that policy makers have more work to do to in America to limit the damage of this crisis than in other developed countries. Comparing the U.S. to Europe helps illustrate why.
Monetary policy: U.S. vs. Europe
Let’s start with monetary policy. The U.S. dollar is the principal reserve currency for the world. When crises such as the one we’re currently facing arise, there is tremendous demand for U.S. dollars. This demand is not limited to just America—importantly, it’s a demand seen everywhere in the world.
In order to make sure that global financial conditions do not tighten to the point where even more serious economic damage is done than has already occurred, the U.S. Federal Reserve (the Fed) has to ensure that there are enough dollars to meet this almost insatiable demand. Thus, the massive response of the Fed. Of course, the European Central Bank (ECB) and other central bankers have also responded to the liquidity needs of their constituencies, but the U.S. dollar occupies a unique place in the global financial system—and the Fed has recognized the responsibility of that privileged position.
Fiscal policy: U.S. vs. Europe
When comparing the fiscal relief packages seen in Europe to those in the U.S., some notable differences exist, particularly as it relates to the relative social safety nets of the U.S. and Europe. One of the keys to the success of the responses of policy makers is to try to limit the economic damage of the crisis, so as not to inflict significant permanent damage to the pipes and plumbing of commerce, or to the ability of the consumer to resume spending upon recovery from the virus.
In order to ensure consumers are not permanently impaired in their ability to consume, policy makers need to provide support. Bluntly, the social safety nets in Europe are more extensive than those in the U.S. Universal healthcare, more generous unemployment and sick leave benefits are among the most notable differences. In the U.S., just to match the existing safety nets in Europe, policy makers are having to make unique efforts to approve and fund that relief. An examination of the package approved by the Senate last night demonstrates how much of the focus is in those areas.
The net result is that the fiscal response necessary to avoid massive permanent consumer spending impairment is larger in the U.S. That is not to say Europe is off the hook in terms of fiscal relief, but rather to say the need is not as great.
To give some context to this, courtesy of our friends at UBS, here are the sizes of the packages being considered or approved in the U.S. and Europe, in terms of percentage of annual GDP (as of last night):
- U.S. package passed by Senate: 10% of GDP
- EU: 0.3% of GDP
- France: 1.9% of GDP
- Germany: 4% of GDP
- Italy: 1.4% of GDP
- Spain: 2.8% of GDP
- UK: 3.2% of GDP (the UK is closer to the U.S. on some of these issues, and they may need to do more than the EU countries).
There are a lot of other countries that are initiating relief packages, but the above should give credence to the relative size of the U.S. packages. Ultimately, the U.S. is doing more in this crisis because more is needed.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
Copyright © Russell Investments Group LLC 2020. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
CORP-11638
