Hirst: It’s All About Balance Sheets

Your Real Vision Daily Briefing for May 7, 2020

Ed Harrison & Roger Hirst discuss the latest developments in markets and examine the effects of central bank liquidity on asset markets.

  • People assume the dollar should be weaker because the Fed has been so aggressive, but the Fed’s balance sheet as a percent of GDP lags almost everyone else.
  • Europe is struggling over how to address the questions of debt mutualization and default for countries that will emerge from this crisis in enormous debt, like Italy and Greece.
  • Though many countries are coming out of lockdown, the consumer is going to remain under pressure for a long time, which is a solvency issue not a liquidity issue.

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Major global banks have taken extreme policy action to paper over the cracks during the coronavirus crisis, but none has been more aggressive than the Fed, which has some people assuming that the dollar should be weaker because the Fed’s response has been bigger, Roger Hirst said during today’s Real Vision Daily Briefing.

But if you look at the size of the Fed’s balance sheet as percent of GDP, it lags the ECB, Japan, and almost everybody else. Hirst said this is because the volume of dollars that goes through global markets is so much bigger than any other currency, and that explains the dollar’s continued strength.

In Europe, the German constitutional court’s challenge to ECB government bond purchases is raising questions about debt and default. Because Italy and Greece will emerge from the crisis in enormous debt, and tourism is unlikely to recover anytime soon, Hirst said he thinks the ECB will have to find a way to fudge it.

“The problem has built up over decades of excess debt and excess leverage in households, corporate, and government,” he said. “It is not going to go away. They’re hiding it but they’re not getting rid of it.”

Hirst also discussed what the future will look like for Sweden versus countries that were less well prepared for the pandemic. He said its position of taking costs on the front side because it knows there will be a benefit on the backside will likely help the country fare better economically than ones who – many because of population density – had to move to a full lockdown.

If countries in lockdown got this wrong there will be a dramatic economic fallout and we will look back and realize Sweden did it the right way, he said.

Whichever model countries are taking, Hirst said that we all need to be prepared for the effects to last a long time.