GavekalResearch The Daily

December 21, 2020

Page 1

A “Little” Stimulus For Christmas

Yanmei Xie Having agreed another fiscal stimulus, the US government is poised to
yxie@gavekal.com give its population a US$900bn Christmas gift. This revives relief programs
set up at the pandemic’s outset, testifying to both their success in keeping
consumers and businesses solvent, and their popularity (see Is US$2trn In
Fiscal Support Enough?). The difference with this latest stimulus is that it is
smaller than what went before. Rather than trying to replace lost income, the
new scheme aims only to lessen hardship. That makes sense as US activity is
not collapsing like it did in March, nor does this seem a big risk. The chief
economic concern right now is a pause, or mild reversal, in the ongoing “stair
step” recovery (see The Brake On US Growth). The latest fiscal shot in the
arm can shorten the pause, or make a second growth dip shallower.
The package, which is scheduled for a vote in both houses of Congress on
Monday, has three main parts, with (i) more unemployment benefits, (ii)
There are three main parts to the new another round of forgivable loans to small businesses, and (iii) a second
fiscal package stimulus check for most Americans. The focus is on giving relief to hard-hit
people and firms, and so averting missed payments and bankruptcies. And
while stimulus checks are not necessary for consumption growth to persist
(see The State Of The US Consumer), they may give a boost to spending.
The unemployed will get US$300 a week—half the level of the program that
expired in August—plus payments by states averaging US$384 a week. The
latest funding will stop millions of people losing unemployment benefits the
Unemployment benefits have been set at day after Christmas. An unstated aim of the scheme is to support the jobless,
a level not to dis-incentivize work without hampering hiring. A criticism of the first program was that it dis-
incentivized work, as benefits exceeded the pre-crisis median wage, and paid
two thirds of claimants more than their prior salaries, according to one study.
The enhanced benefits of this scheme will end in early April, suggesting that
most lawmakers think all pandemic restrictions will have been lifted by then.
This seems to be a reasonable assumption given the roll out of vaccines.

Checking The Boxes

Our short take on the latest news
Fact
US current account deficit
grows to -US$179bn in 3Q20,
from -US$162bn in 2Q
Eurozone current account
surplus rose to €26.6bn in Oct,
from €25.2bn in Sep
German IFO business expecta-
tions rose to 92.8 in Dec, from
91.8 in Nov
UK retail sales fell -3.8% MoM
in Nov, from 1.3% in Oct
Consensus belief
Above US$189bn expected
N/A; 12-month surplus €228bn
(or 2.0% of GDP), down from
€272bn (2.3% of GDP) a year
Above 92.5 expected; current
condition rose to 91.3, from 90.0
Above -4.2% expected; YoY,
retail sales rose 2.4%, from 5.8%
Our reaction
Highly valued dollar and prod.
disruptions boosted deficit;
those factors now abating
Weaker travel exports & lower
overseas earnings cut surplus vs
2019; vaccine hope for 2021
Lockdown hitting sectors like
travel but economy resilient
with growing optimism for 2021
Big shift to online as shoppers
avoid high street (-30% YoY); UK
faces new curbs/Brexit

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 GavekalResearch
Extending the paycheck protection
program should help avert more
bankruptcies
Most Americans will get a stimulus check
of up to US$600
Americans on the whole are sitting on
significant cash piles
The deal somewhat lessens constraints on
the Federal Reserve and the Treasury from
relaunching liquidity programs
The Daily
December 21, 2020
Page 2
The paycheck protection program, which gave low-interest loans to small
businesses, will get another US$280bn. If the new loans come with the same
terms as the previous round, they can be forgiven if the borrower restores its
payrolls within a specified period. Despite initial glitches, the PPP program
helped avert mass business failures (see The Fiscal Fix). Its renewal should
help vulnerable firms stay solvent. Applicants this time are likely to be
smaller both in number and size as recent social-distancing restrictions affect
a narrower set of businesses, mainly in the entertainment, hospitality and off-
line retail sectors, while most other economic activity has carried on.
Most Americans will receive another check of up to US$600 each. This was
a late addition to the stimulus package and an idea supported by both the
White House and progressive Democrats. It was probably not necessary to
support consumption, given that households as a group are already sitting on
big cash piles, saving rates are normalizing as the labor market recovers, and
vaccines offer a more hopeful future. Still, stimulus checks could offset any
short-term drag on consumption due to the current Covid outbreak.
Another late addition to the bill was language stopping the Federal Reserve
and Treasury from relaunching “clones” of emergency lending programs set
up in March. These were set to expire at the end of the year, after Treasury
Secretary Steven Mnuchin chose not to extend them. My colleague Will
Denyer says this move need not worry markets as (i) the Fed is still printing
money and liquidity remains plentiful, and (ii) should a liquidity crisis develop,
the Fed and even a divided Congress have shown themselves willing to react
quickly with huge programs. While the original proposal prohibited “similar”
programs from being established, the compromise deal only prevents exact
clones from being created, and even this can be done with Congressional
approval. In fact, Will argues the ending of these facilities should be bullish,
as it will allow the Treasury to spend some of its cash pile in lieu of more
borrowing (see The Treasury’s Liquidity Programs And Markets).
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 GavekalResearch
This deal could point to a dealmaking
mood that supports more stimulus
The Daily
December 21, 2020
Page 3
President-elect Joe Biden has called this stimulus deal a “down payment”. His
public spending plans call for vast investment in infrastructure, housing and
green technology (See A New FDR?). These ambitions, however, may wither
in a divided Congress, unless Democrats win both runoff elections in Georgia
on January 5 and take control of the Senate. With those high-stakes elections
looming, however, this Christmas package indicates that even Republicans
consider it politically unwise to block stimulus. So perhaps with the same
formula of public pressure and centrist deal-cutting, even more stimulus
spending in the new year is not entirely out of the question.
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