Key Points

  • It is becoming increasingly clear that the massive global stimulus is being financed by a rise in money, not debt.

  • Debt borrows growth from the future. The biggest difference between a one-time rise in money compared to a rise in debt is a potentially brighter economic outlook.

  • The biggest risk may be that this isn’t a one-time event. In the future, governments might be more inclined to keep on running big budget deficits financed by central bank money potentially leading to slower growth, weaker currencies, unwanted inflation, and central bank insolvency.

The fiscal costs of the battle against COVID-19 is anticipated to be between 10-20% of global GDP, but could be even higher. To mitigate the economic impacts, central banks worldwide have announced big quantitative easing (QE) programs absorbing debt by purchasing bonds. Although these programs have just begun, the combination of purchases by the U.S.’s Federal Reserve (Fed), European Central Bank (ECB) and Bank of Japan (BoJ) have already set an annual record, as you can see in the chart below.

Combined Fed, ECB, and BoJ buying have already set an annual record for 2020

Source: Charles Schwab, Bloomberg data as of 5/6/2020