Photo by Edwin Andrade on Unsplash
Hey, and welcome to issue 035 of WTF is going on with the Economy?! - the weekly no-nonsense economics newsletter for people living abroad (brought to you by abroaden.co). Hopefully, you've had a great start to 2021!
Here's what we're watching👀️:
The slow unwinding of Brexit.
Despite brinkmanship suggesting otherwise, the UK and EU avoided a no-deal Brexit. That said, here's where the real fun begins.
Although the UK is officially out of the EU, they have two pressing tasks:
Unwind EU rules written into British law (that's how EU law works: the bloc passes a rule or regulation, and each state puts it into their local codes).
Start negotiating new agreements with the European Union to facilitate a long-term bilateral relationship.
None of these tasks are going to be easy. However, Westminster's pressure as the effects of the UK's exit is already beginning to sting.
Vaccine roll-outs and the management of the next few weeks
The next few weeks are crucial for the pandemic. On the one hand, mass vaccinations are beginning to take off.
On the other, the virus is still ravaging global healthcare systems.
Governments must find a balance between keeping the economy as open as possible, supporting sectors it needs to close, getting jabs into arms, and dealing with pandemic fatigue.
Let's take a deep breath - we're almost there.
Stimulus signals in the US
Chaos at the capital aside, last week, the Democrats flipped the Senate to their control.
Now, with Biden in control of both chambers, he can quickly ask Congress to pass more ambitious stimulus packages.
In turn, there will likely be more funds flowing faster, boosting the economy, impacting the exchange rate, and accelerating the recovery.
The bigger question for policymakers will be how to optimize the stimulus to get the most bang for their buck.
Recent FATCA lawsuits in Europe
Good news, Americans abroad! There's a growing movement in Europe to challenge the legality of FATCA.
If the plaintiffs have their way, the EU will strike down this rule preventing you from opening a bank account, all under the guise of GDPR violations (see, GDPR is good for something ;p ).
For my non-American readers, let me quickly explain. FATCA is a US law meant to prevent rich Americans from hiding their money overseas.
"Foreign" banks must report their American clients (including green card holders) to the US tax authorities or face stiff penalties. The problems for US expats are that:
We're really not that rich (as we're just regular people living abroad like you)
The "foreign" banks are actually our local banks, which are either kicking us out or preventing us from using most bank products.
FATCA is a uniquely American problem for US expats. However, other countries are eager to pass similar rules, which would impact their diaspora (i.e., you).
If the EU strikes down FATCA, it will force other governments to balance to (rightly) fight tax evasion while protecting middle-class expats from tax torture.
The long(er) read - the big economic questions for 2021
As a newsletter, we're almost obliged to publish an issue in January wildly predicting the future (FOMO!).
Right.
Instead of going down the clickbait route, we thought it'd be better to look at some of the most pressing economic questions of 2021.
After all, successful investing is more about looking at trends than it is short term events.
What better way to understand the trends than to frame them as questions?
How does the pandemic end?
Hopefully not with a bang (God help us with whatever that would look like).
More seriously, with vaccines rolling out, there is finally light at the end of the tunnel, even if it's a long way out.
As the weeks go on, not only will there be more supply, but there will be more vaccinations taking place.
At one point, we'll reach a critical mass where some form of herd immunity kicks in.
It's hard to tell what that will look like, but it's safe to say that not every country will cross the finish line simultaneously.
Managing that in-between will be a challenge that will create a 'grey area' for the global economy.
How will countries deal with the transition between lockdowns and recovery?
The economy will look different, but not unrecognizable.
However, the pandemic's biggest effect on the economy was the acceleration of certain trends.
E-commerce, for example, is way more mainstream than it was just a year ago (even if it still represents a minority of overall commerce).
By default, physical shops suffered due to the lockdown -- some of which were on life-support even before the pandemic struck.
Now, with their demise all but certain, does it make sense for governments to support these zombie companies even if their models are obsolete?
Companies, of course, need workers. If these firms fail, then their employees will need new jobs.
For many of them, they might not have the right skills for the new in-demand positions.
Governments will need to address this problem and quickly.
The longer someone stays unemployed, the harder it is for them to find work.
We should pay attention to how governments manage this transition since it will largely define the recovery.
Will inflation return?
Prices are deflating in Europe right now.
As we wrote last spring, deflation, not inflation, is what terrifies economists.
Moderate inflation is overwhelmingly a good thing.
When prices slowly increase, it's because there's a lot of demand and, therefore, the economy is doing well.
Over the past year, central banks worldwide over-pumped trillions of euros/dollars/pounds/your favorite currency into the global economy.
At one point, all of this cash should create inflation, which would signal the economic recovery is in full swing.
More importantly, governments need inflation. Here' why:
Last year, countries borrowed record amounts of money during the lockdowns to support their economy (and in many places, they are still doing this).
By the pure laws of the market, interest rates for them to borrow were low - Very low.
Developed world governments can now borrow money for well under 1% (nice, right?).
If inflation returns to a healthy level (generally around 2%), then governments, in effect, will have borrowed for free during the pandemic.
In turn, they can focus on rebuilding their economies without worrying about crippling interest.
Let's hope that inflation comes back sooner rather than later.
How will we rebuild? 🏗️
Right now, there's tons of political talk about building back better with a focus on income inequality and the environment.
We already know that green investing is currently one of the hottest investment trends.
Will policymakers step up their rhetoric with action?
Or will they step aside and the market dictate the change as it's already doing?
In all likelihood, it will be a mix of both - with governments providing incentives and the economy doing the rest.
That said, each country will approach the equation differently, with potentially varying results.
Will we have a true remote working revolution? And if so, will governments facilitate this transition?
At one point, almost every office worker on the planet was working from home.
Back in the Spring, there was a non-stop torrent of articles about how remote working is the new normal.
At the time, remote working was an ad-hoc affair.
Now, with companies and employees alike asking for the concept to become more permanent, governments will need to step up and address some glaring issues.
For one, current labor and tax laws aren't optimized for long-term remote working.
Ask anyone who already works as an international remote worker, and she'll tell you how she has to either register as a freelancer or create a local company just to send invoices and pay taxes.
Indeed, many people and companies were caught off guard by these cross-border tax rules last fall.
More crucially, states in the US and countries in Europe will face a fiscal reckoning that they probably didn't want to address.
There will likely be demand for people living in cold, higher-tax and cost of living places (like the Northeast of the United States or Northern Europe) to move to warmer, cheaper climates and work remotely from there.
While this mass migration will be greatly welcomed by the countries that receive the workers (since they'll spend their money and pay taxes there), the places workers are leaving will lose much-needed tax revenue.
Will higher-cost states in the US and countries in the EU block more fluid remote working laws on fiscal preservation grounds despite the movement's popularity?
It's obvious that international or interstate remote working needs a better legal framework.
Will we get it, and if so, how will that impact local economies?
What will travel look like? ✈️
Okay, so this question isn't directly related to economics, even if it's an indicator of the overall economy.
However, as people living abroad, we kind of love to travel. It's in our wiring.
After a year-plus of the worst peacetime travel industry on record, many of us are longing for a return to wanderlust.
Tourism and travel will come back, but it will look different.
Will masks become an integral part of flying?
Will there be 'health passports' and other such measures?
Will travel even rebound to what it was before?
It's obviously impossible to tell.
That said, I think it's important to remember what happened after other major historical events.
The attacks of 9/11 forever changed the way we took airplanes with heightened security permanently in place from every step of the way.
Ditto when someone tried to blow a plane by smuggling explosives in a water bottle.
Yet despite these events, travel came back stronger, continuing to grow over the long run.
And we think that is representative of not only the travel industry but humans as a whole:
Despite whatever obstacles we face, humans are extraordinarily adaptable, finding ways to survive in the face of almost anything (even if we sometimes do it while kicking and screaming).
The economy will look different, but it won't necessarily be inferior.
Of course, glaring weaknesses need addressing, particularly in terms of growing income inequality and the looming environmental disaster upon us.
Hopefully, whoever is answering these economic questions in 2021 can make "different" better for everyone involved.
We'll keep you posted right here on the progress.