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The U.S. election drama may be distracting investors from the bigger story - the resurgent pandemic, persistent lockdowns and the uncharted waters into which economic policy has plunged.

The outcome of the election will be critical in deciding who presides over the world’s biggest economy for the next four years. But it says nothing about what’s unfolding in front of the victor.

World markets rallied into the vote on the assumption that polls and bookmakers were correct and that Democrat Joe Biden would replace Donald Trump as president, with a high chance of a Democrat sweep of the presidency and both houses of Congress. Regardless of politics, investors buy into that because they see it as a clear result avoiding weeks or months of wrangling and policymaking inertia, and also see it easing a path to more fiscal support - perhaps one re-filled for many years.

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What’s for sure is the latest dire course of the COVID-19 pandemic - and new rounds of draconian nationwide lockdowns across Europe - mean that trillions of dollars of more support may no longer be optional.

And with growing doubts about both the timeline for and the efficacy of a COVID-19 vaccine, it’s increasingly hard to see where that lengthening support bill will end.

Even before this second wave of lockdowns, the International Monetary Fund was anxious that not enough was being done.

In a blog entitled “The Crisis is Not Over, Keep Spending (Wisely),” IMF economists said on Monday the $11 trillion of support so far from the United States, Britain and other G20 and emerging countries was still not enough and that early ending of these programs could be very damaging.

“A premature withdrawal of support would impose further harm on livelihoods and heighten the likelihood of widespread bankruptcies, which in turn could jeopardize the recovery,” they said.


If that was true assuming the pandemic had crested, then the latest developments amplify it. A return to economic contraction in the fourth quarter is now widely expected and estimates of new spending, deficits and debt will rise further from here.

Goldman Sachs, for one, sees euro zone output shrinking 2.3% over the final three months of 2020 compared with an earlier projection of 2.2% growth, with a similar revision to UK growth.

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Such a twist in the United States and elsewhere can’t be ruled out. If so, it’s likely to mean fresh stimulus spending of much more than the about $2 trillion Congress already failed to agree on before the election.

How does this seemingly endless new spending and debt get funded affordably? Like their governments, central banks are not about to stop supporting economies in the middle of a pandemic after pledging “whatever it takes” for several months.

Last week, the European Central Bank effectively signaled it would announce hundreds of billions of euros more of bond buying as soon as next month, and the Bank of England is likely to top up its bond buying this week too. The Federal Reserve gives its policy decision on Thursday.

This effective central bank underwriting of new government spending and debt has already forced unprecedented rethinking of prior policy parameters - and even the use of money itself.


It may be no surprise then that, faced with a plummeting use of physical cash during the pandemic, central banks appear to have accelerated plans for developing digital currencies, or CBDCs. Sweden and China are already at the forefront but the ECB too is committed to its study and development. Everyone from the Bank for International Settlements to the IMF itself have been hosting taskforces and study groups on the issue all year.

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Many strategists now assume we will see a fully fledged CBDC within 3-5 years - with potentially huge benefits for transparency, efficiency and the financial inclusion of tens of millions of unbanked citizens worldwide, but with profound implications for how the current money system works and how government financing leverages off that.

Will traceable digital ledgers allow everyone to have an account directly at the central bank? Will it be interest bearing, hence a more powerful and direct monetary policy mechanism which may also deal with the potential problem of cash hoarding in a world of more deeply negative interest rates?

But what then happens to disintermediated commercial banks and broader financial stability? What would it mean for exchange rates if central bank accounts could be held internationally?

Research firm CrossBorder Capital estimates the Fed’s balance sheet could explode fourfold to as much as $30 trillion from $7.2 trillion at present were it to hold both retail and wholesale accounts. It also speculated about what the U.S. Treasury holding an open-ended account at the central bank would mean for deficit funding going forward.

“In terms of QE, we may not have seen anything yet,” it said.

At present, designs appear more anodyne than all that would suggest, and tend to look at more hybrid digital units that exist alongside physical cash and partly use the wholesale banking system as issuers of the “wallets” and accounts.

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But it’s not hard to see where this may end up, given the unanswered questions about economic policies going forward.

“Ultimately CBDCs could change the way the financial system works,” said HSBC’s James Pomeroy.

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