By Pedro Barreto, Chairman & Founder, Ativore Global Investments
Senate leaders and the Trump administration reached a bipartisan deal on the morning of this Wednesday, expected to be voted on unanimously later today, to recover the U.S. economy in a manner unprecedented in history.
The roughly US$ 2 trillion agreement between the Senate and the White House aimed at rescuing the country's economy, businesses and individuals is the largest recovery plan in U.S. history. To give a sense of its magnitude, we present below the costs of some previous recovery plans, in dollars adjusted for inflation (today's dollars):
- Marshall Plan: US$ 100 billion
- Post-Afghanistan War recovery: US$ 120 billion
- Post-2008 crisis bailout: US$ 600 billion
The legislation provides for direct payments to most Americans (between US$ 1,200.00 and US$ 2,400.00 depending on income), loans for small businesses that can be forgiven if the companies use them to keep workers on the payroll, aid for the hardest-hit sectors (such as airlines and the hospitality sector), increases spending on unemployment insurance that will give Americans four months of their income if they lose their jobs due to the coronavirus crisis, and directs substantial funds to hospitals and healthcare providers.
Additionally, the Federal Reserve cut interest rates to near zero and launched an unprecedented effort on Monday to keep money flowing to businesses, households and cities. With restaurants, airlines, hotels, automakers and so many other parts of the economy at a standstill, there is an enormous need for short-term loans to help companies survive until people can go out again.
The Fed is trying to address this by guaranteeing unlimited repurchases of U.S. Treasury securities and mortgage-backed securities, an extraordinary support to the lending markets that goes far beyond the central bank's effort in the 2008–2009 crisis, when the Fed injected nearly US$ 4 trillion into the financial system over several years.
Since the vast majority of U.S. real estate investments are leveraged with mortgage financing, the risk to U.S. real estate, had these measures not been adopted, would have been a systemic increase in financing repayment demands, for those loans that were maturing (these loans are normally rolled over by banks after a reappraisal and a formal approval process), causing a domino effect of defaults, since owners would not be able to pay the loans, nor to replace them with others in the current context.
The main variables that will determine the impact of the Coronavirus on U.S. economic activity in the future will be:
- The duration of the lockdown;
- The effectiveness of the recovery package agreed upon by the U.S. Senate.
After an initial period of irrationality caused by panic, opinions are beginning to emerge, weighed by new scientific studies, advocating the replacement of the complete lockdown (which has the potential to lead the world economy into a historic depression) with more surgical disease-containment strategies, calculated to last as short a time as possible, based primarily on a calculation of the conditions for protecting the at-risk population.
The President of the United States, Donald Trump, indicated that he wants the country's economy to be open again by Easter and defended the resumption of businesses closed because of the coronavirus. He argued that, although more people die annually from flu and car accidents, the economy does not stop because of that. "The cure cannot be worse than the disease," adding that the shutdown could "destroy the country."
It is difficult to predict whether this set of measures will be enough to prevent this risk, because market paradigms have been broken, there is no adequate benchmark for comparison, and the duration of the lockdown is still an uncertain variable, unless the more surgical strategy to combat the Coronavirus, as signaled by President Donald Trump, is in fact implemented and successful.
But certainly the magnitude of the bailout package agreed upon in the U.S. (an amount greater than Brazil's GDP) demonstrates that the fiscal might of the American economy, combined with the political will to use it, has no parallel in today's world.
