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SA7 Questions Query

A

Ankit Anil Murarka

Member
Hi Colin,

Could you please help me understand impact the current situation of COVID-19 Pandemic on the Financial Industry.
I hope to know, the effects of
1) Announcements of Various Trillions of Dollars of Stimulus Packages in the USA
2) Furlough Schemes announced in the UK by the British Finance Minister

corresponds to what kind of situation?
Does it correspond more to a QE or a QT or none among the two?
Will it create a Low interest rate or High interest rate environment?

Many thanks,
 
Hi, This would be a big topic. Too big to add to a thread I think, as I would be writing for days. Stimulus packages have a big impact on government debt, credit rating, and QE, but you would need to read around the various news articles to ensure you are able to talk about it in an exam. Furlough schemes have been put in place in the UK and various other countries. They are simply another form of government subsidy, and lead to more government borrowing. Again you should read around if you are uncertain as it is a big topic.
 
Hi Colin,
Thanks for responding. I understand these are massive topics to discuss on.

Could you give me a clarity on:

1) is it appropriate to think of the Stimulus package and Furlough scheme on similar lines of QE & low interest rate environment , as even QE involves huge government borrowings?

Thanks,
 
I would separate government stimulus from QE. the first is when a government overspends, and it boost the economy. If a government taxes less than it spends, and almost all governments do to a very large extent these days, then the economy will be boosted. The term "kick start" the UK economy has been bashed around for so long I am surprised that the economy is not kicked to death. The furlough scheme is a cause of enormous government stimulus, because the government is essentially paying everyone's salary in the pandemic.
QE is a method of pumping cash into the economy. If it is done when the government has balanced its books, and when the government is not issuing too many government bonds, then it will drive long term interest rates lower. This can also stimulate growth, but through low rates rather than government spending (ie different).
the situation we are in now is that we have both going full tilt. The government is spending like there is no tomorrow and issuing potentially up to £350bn a year of new bonds a year. The central bank is creating cash and buying bonds to a similar tune (QE in the UK was expanded in the pandemic from around 400bn to around 850bn). So the impact on interest rates may be zero, but the impact on government debt is huge.
 
Thanks Colin for a prompt reply.
This explanation helps ... :rolleyes:

Regards,
Ankit
 
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