John Mauldin argues monetary policy tools are not designed for a coronavirus type situation but government fiscal stimulus may help us 'muddle through' the crisis

John Mauldin argues monetary policy tools are not designed for a coronavirus type situation but government fiscal stimulus may help us 'muddle through' the crisis

By John Mauldin*

For the last 3+ years, I have maintained it would take an “exogenous” event to send the United States into recession. Historically suboptimal growth? Sure, but sub-3% growth isn’t a recession.

The coronavirus obviously qualifies as an exogenous event. But that doesn’t mean a textbook two-quarter recession, although it certainly may. Financial markets aren’t waiting to find out what COVID-19 will do. Much of the selling is fear of the unknown. The modern world hasn’t faced anything quite like this, and it’s coming at a time when the economy is vulnerable for other reasons.

We actually face two concurrent crises. One is about public health, the other about the economy and markets. They won’t necessarily track each other. We might find the virus is less deadly and infectious than feared but that the fear itself (plus the control and containment measures) harms the economy.  

After talking to economists and medical researchers this week, I am pretty confident in two things.

First, this is going to be a long slog. The virus will spread slowly but widely. The containment measures are simply buying time. There’s no need to panic, but we should all take common-sense protective measures.

Second, as usual, I am the “Muddle Through guy.” I think we’ll get through this. Not without some damage and tragic loss of life, but it won’t be the end of the world. This is not the zombie virus. I wasn’t thinking of viruses when I said the 2020s would be the Decade of Disruption, but COVID-19 may mark the beginning of it.

Here’s the worst part: The Federal Reserve and other central banks can’t bail us out this time. Their tools aren’t designed for this kind of problem. Powell, Lagarde, Kuroda, and others are all making their ritual pledges to “stand ready” with support. They may even be serious. But they have little to offer. Rate cuts are not vaccines.

We may soon, after a dozen years in monetary policy training wheels, find out if we can still ride a bike.

Y2K redux

Longtime readers may recall these letters began in the late 1990s when I was writing about the “Y2K” computer problem. Looking back, it is hard to believe how much fear it generated. Some people literally headed for the hills. I said, consistently, we would have problems but get through them. And that’s more or less what happened. A few little glitches, then it was over.

However, the problem was real. Many vital systems would have stopped working on 1/1/2000 had they not been painstakingly rebuilt. We avoided catastrophe because smart people got to work and prevented it. Having that fixed date helped focus their efforts. The coronavirus is different in that regard; experts are sure it will spread, but they can’t say how fast.

This week I spoke with (among other experts) Dr. Joseph Kim, the CEO of Inovio. His company (like several others) is working on a COVID-19 vaccine. He’s been in this field many years and knows how these diseases spread. And he believes this one is not going to care about borders. The outbreaks we are now seeing in South Korea, Italy, and other places are only the beginning. Similar clusters will eventually appear in the US.

This virus’s unique challenge is its ability to spread via “asymptomatic” carriers. With SARS and Ebola, it’s very obvious that someone is sick and contagious. They are relatively easy to avoid. Infection mainly happens with medical personnel and family caregivers. With COVID-19, you can seem perfectly healthy, have no fever or other symptoms, but still carry the virus and spread it to others.

You can also catch the virus, recover, and never know you were infected. We don’t know how often that happens, which makes evaluating the data difficult. The Chinese data seems to show about a 2% fatality rate among the people who show symptoms and are diagnosed positive. That’s not necessarily everyone who is infected, so the true fatality rate could be lower. 

Dr. Mike Roizen said the problem is we don’t know how many people actually have had the virus and how many died as a result. In calculating a fatality rate, we know neither the numerator nor the denominator with truly accurate precision for the equation. As we get more accurate data, we can make better assessments.

That being said, Dr. Roizen and Dr. Kim both told me this virus is far deadlier than our standard influenza. It appears about 20% of symptomatic people are sick enough to need hospital care, even though most ultimately recover. That’s enough to potentially strain our healthcare resources, generating second-order effects as people with other medical conditions have to wait for treatment.

COVID-19 is unlikely to disappear in warm weather. Hong Kong is always warm and that does not seem to be stopping the virus. The likeliest scenario is that the world now has, in effect, another flu-like virus that will be with us for years. If clinical trials are positive, one or more of the vaccines currently in development could be ready later this year. Many biotech companies are working on it. Moderna said it plans Phase 1 trials to start in April. Dr. Kim cautiously (which is his way) said Inovio’s trials should begin in late spring or early summer.

Multiple vaccines will compete, and we will see which is the most effective. But we are, at minimum, several months away from that point, and the virus is still spreading.

In the absence of reliable information, well-meaning people will try to fill the void and make matters worse. A lot of misinformation is spreading on social media, and sometimes in real media, too. I saw one story calling it an “infodemic.” That’s funny but accurate.

We have better data on the economic impact.

Supply chains unlinked

We see many comparisons of this virus to the 2003 SARS outbreak. That one also began in Asia and quickly spread worldwide. There was great concern at the time, but the economic damage proved minor.

China’s economy is both much bigger now and more integral to world trade. Chinese GDP is up 4X since then, and its share of worldwide trade flows has grown 10X. Businesses all over the world depend on Chinese-made components and raw materials, many of which can’t be sourced elsewhere, at least not at the same prices. And “just in time” production means producers don’t have much inventory on hand. Right now, it is dwindling as Chinese factories and ports are either shut down or operating at much-reduced capacity.

Here’s how one expert described it to South China Morning Post (with my emphasis).

“It really is death by a thousand cuts,” said John Evans, managing director of Tractus Asia, a company that has 20 years’ experience helping firms move to China, but which over the past two has had more enquiries from businesses looking to leave. “This is a black swan event and I don’t think we’ve seen anything like it in recent history, in terms of the economic and supply chain impact in China and across the globe.”

As I write this, China’s travel restrictions have eased, and businesses are starting to reopen. But schools remain closed, which suggests they are not confident the outbreak is truly under control. Beijing is letting local governments set their own rules, so conditions vary greatly across the country.

The economic problem is that inability to obtain one critical component can shut down an entire factory. In this situation, 95% or even 99% may not be good enough. We could be weeks away from some US and European producers running out of input materials. Then what? Plant closures and probably layoffs.

Worse, some Chinese producers depend on parts from the West, which they may stop buying if their own factories stay closed. That’s not only a potentially huge problem for US semiconductor makers but others as well.

And it’s not just China and not just the virus. Growth was already weakening for other reasons, such as the trade war. Here’s David Rosenberg.

The bottom line is that the coronavirus occurred with much of the world experiencing anemic growth after a year in which supply chains were already negatively affected by all the tariff actions. “Phase One” did not completely ameliorate that condition. World growth was the weakest in a decade in 2019 and the latest move by the IMF was to trim this year’s outlook. And that was before the coronavirus, which has imposed tail risks for the global economy and financial markets.

A tail risk in the sense that we have such little knowledge about this coronavirus, why it is spreading, or how to treat it. The spread of the virus outside of China to South Korea, the other economic giants in Asia, and to Italy, is particularly worrisome. The only thing we know with certainty is that South Korea is a massive exporter and much of its outbound manufacturing shipments are inputs into the global production process. So, the implications for disruption to global supply chains are significant, irrespective of the slowing in the rate of infections in China. The cat is out of the bag.

David’s point about South Korea is important. The outbreak there could well lead to the kind of industrial paralysis seen in China. That would have a quick and severe impact on companies in Japan, North America, Europe, and everywhere else. The Italy outbreak could have a similar but smaller result. Italian authorities responded quickly, but people infected there have already spread it throughout Europe.

Meanwhile, here’s a map of cases in Japan (excluding cruise ship passengers). Note the cluster in Aichi. That’s Toyota headquarters and a heavy manufacturing region.

Japanese Prime Minister Shinzo Abe has asked schools to close throughout Japan. If the map keeps reddening, factory workers may be told to stay home, too, even if their plants can get the parts they need. This would cascade through the world economy.

Fed futility

We all learn by experience. For a dozen years now, investors have been rewarded for buying every market dip. Indexes always recovered to new highs, often because central banks delivered some kind of stimulus, or at least promised to do so.

So in one sense, seeing this week’s losses as another buying opportunity is rational. Possibly time will show that’s what it was, but count me dubious. We have known for a long time something would pop the balloon. It proved to be Teflon-coated, impervious to everything bears could throw at it. But bears didn’t create this virus.

Nonetheless, investors are increasingly convinced the Fed will respond with more rate cuts. At year-end 2019, the futures-implied probability of three rates cuts this year was only 20%. Now it’s up to 80%.

Note, any rate cuts would be on top of the existing T-bill purchase program and repo market liquidity injections. I think those are more likely to be expanded than reduced.

If it happens, the Fed will be in full-on stimulus mode, akin to 2008–2009. But it probably won’t have the same kind of effect. Peter Boockvar explained this week.

A rate cut won't bring Chinese factories back online any quicker. And a rate cut won't get people flying and traveling again until the virus peters out. Either way, the US bond market has already eased for them. The US 10-year yield at 1.37% [now 1.18%! – JM] has essentially cut rates by 25 [45] bps over the past two weeks for those looking to refi or purchase a home.

Lower rates may ease the cost of buying a car but with car prices at record highs (not hedonically adjusted), it won't do much. Credit card rates with 3 Fed rate cuts are still near 17% so another rate cut or two won't help much here. And with respect to a rate cut encouraging more capital spending, the cost of capital clearly hasn't been a binding constraint on any capital decision for years. Will a rate cut or two 'ease financial conditions', aka goose asset prices? Maybe but maybe not.

Monetary policy tools just aren’t designed for this situation. All they can do is stimulate demand, and virus containment measures will make any such demand hard to fill. Fiscal stimulus might help but would also increase the already massive deficit.

In China, the government and central bank are responding with targeted loans to affected businesses rather than macro policy changes. That’s probably the right move, but with debt at such high levels, they really had no choice.

That’s the big risk here. I think investors are about to learn central banks won’t always be there for them in every situation. If the delicate faith that’s kept markets rising should break, then what? It’s a long way down.

So what do we do? In my case, this doesn’t change investment strategy. I am not a buy-and-hold advocate. I’m in funds and professionally managed accounts that can move out of the markets or directly hedge when necessary. Some have already done so. I expect others will do likewise if conditions worsen.

As an aside, bond markets are acting as if this is a massively deflationary event.

Some silver linings

  • We must remember that 86% of Americans are employed in the service industry/related areas. The manufacturing industry won’t simply shut down, either. Absent multiple large outbreaks in cities across the US, which would cause serious changes in consumer behavior, the US could prove more resilient than some others. This will be contained at some point and business and consumer life move on.
  • Last week, only a few US labs could test for the coronavirus. Clearly, we were massively unprepared, but that is changing fast. As you read this, already 93 labs should have testing facilities. A bedside diagnostic is coming, too, as 70 companies are working on it. The FDA is changing its procedures to allow confirmation at labs other than at the CDC’s main headquarters. This will ease concern by quickly separating actual COVID-19 cases from common colds and flu.

I expect the number of labs which can administer tests to increase dramatically over the next few weeks. New testing kits will come online. I can imagine hospital administrators and staff are beginning to think about how they would handle an outbreak in their city.

  • There is a high probability that vaccines will be available by the end of the year/early next year. We may all be getting an annual vaccine for COVID-19 along with the flu shot.
  • This may seem counterintuitive, but in a certain sense, COVID-19 provides a massive wake-up call to the world. We were not prepared. I, perhaps optimistically, think that will be different in the future. This is not the “zombie virus” of the post-apocalyptic movie genre, but it should make mankind in general, and countries in specific, start thinking about the next, perhaps more serious outbreak.
  • On the economic front, I think it is safe to say that supply chains will be radically different by 2022. Technology was already bringing manufacturing closer to the consumers. I expect that trend to accelerate. That should mean significant capital investment after the COVID-19 problem is contained, providing a nice economic stimulus.
  • Governments everywhere (including the US) need to think about the supply chain vulnerability of certain critical necessities. I don’t mean T-shirts and auto parts. I am thinking of medicines and medical supplies, many of which are now produced in China. Do we need multiple sources? Are some items so critical we should produce them in multiple places within countries? Just asking… This should begin now.
  • As of Friday, there were 60 cases of coronavirus in the United States, the bulk of which were from one cruise ship. All but one could be traced to either a cruise ship or a person or spouse coming from China. We should expect more, but for now, it seems to be spreading slowly here.  
  • I think the base case is that China and Europe enter recession. I would think the US is a coin toss. Because we don’t know of the extent of the potential outbreak, it’s really hard to say. The foreign slowdown will have an effect, but recession isn’t inevitable.

    *This is an article from Mauldin Economics' Thoughts from the Frontline, John Mauldin's free weekly investment and economic newsletter. This article first appeared here and is used by with permission.

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I think what is concerning is that if the all the Central banks i.e. AU NZ UK and US drop 0.5% then the AU will be at 0.25%, the US will be at 1.25%, NZ will be at 0.5% and UK will be at 0.25%. What's going to be the shot in the arm for equity markets after this when there literally is only 0.75% worth of cuts remaining from the Fed and thats it! Coronavirus taking out the central banks near final life-line for the economies & stock markets before quantitative easing..

hat's going to be the shot in the arm for equity markets after this when there literally is only 0.75% worth of cuts remaining from the Fed and thats it.

Cuts below 0 and more QE. The U.S. and much of Anglo Saxonia relies on equities to comfort the boomers and to deliver on societal promises on "saving for retirement."


One of the few articles posted here that is worth reading from start to finish.

OCR rate cuts cannot fix the problem. We were at what during the 2008 GFC ? 6 or 8% interest rates so cuts could have at least some minor effect back then.This time it is dufrent.

Agreed Carlos.
Although one could readily debate some of the detail, it is a well measured article with some very salient points.

On reading through I got reminded of Raymond Chandler’s hapless hero Marlow. something like “ a black pool appeared at my feet, I dived in, there was no bottom.”

those interest rate cuts just followed the market down, Central Banks were never in control.

Agreed, well? in order to keep/increase the 'number' of GDP, how many business willing to take more loan at lower interest when this type of particular disturbances is related to isolation & curbing of goods movement? - most likely I presume it will go to the virtual activities such as; 1) buying land/properties in hope for future gains/product you can touch and magically bring future wealth 2) bitcoin anyone?(not a product you can touch) 3) ouh those drone, robots, IT gears.. apparently they on the plan to make it to deconstructed product from point A then reconstructed back at point B to be consume - no need for people movement/interaction - WoW.. rbnz, bring it on the negative OCR soon please - we want that manure to 'stimulate growth' - central banks worldwide movement, they're all so predictable.

The most effective way to get over a crisis is having a strong and centralised government to manage everything for at least a period of time.

Need I say more?


Suffering from constipation? struggling with hot weather? Your wife and mom do not get along? Having trouble washing off a stubborn stain of your favorite shirt? Searching for elixir of immortality?
Do not despair! there is a solution and I do not need to say more.


Strong - haha! What absolute nonsense.

The Chinese government are the exact reason why this crisis as happened in the first place due to their complete failure to act. Instead they locked up the people who were trying to raise the alarm. Their inaction due to the top down nature of the political system allowed this virus to take hold and spread. Had they allowed open dialogue, de-centralised decision making power and acted much quicker this wouldn't have even been a problem.

Failure to act?? that would be JA and the COL so far


The only difference between them and the other lot is that National would have re-opened the borders by now to keep their paymasters happy. Otherwise they would have done the same.


Yeah yeah yeah, blah blah blah. Xing

Excellent Belle - well said!

So China has been in crisis for over 2,000 years?

To be fair anarchy can be worse so a balance is needed - somewhere between Somalia on one hand and North Korea on the other. Maybe it is all bad media but China seems to be too near the dictatorship end of the spectrum. Even the very best of dictators (say debateably Napoleon) eventually go wrong but they leave no mechanism for correction. So I'd prefer Jacinda or Simon or Winston or ‎James Shaw‎/‎Marama Davidson to most of the alternatives the world has to offer.

yes we can not have freedom of speech people might say nasty things about the leaders
China has rolled out a new law effectively barring internet users in the country from posting negative content about the country online.
• The Provisions on the Governance of the Online Information Content Ecosystem took effect Sunday. It was first announced in December.
•“Illegal” online posts now include “dissemination of rumours,” “disrupting economic or social order,” and anything “destroying national unity.”
• The China Law Translate project described the conditions as “distressingly vague and easily abused.”
• The new law could now be used to suppress news about the novel coronavirus. China has already censored details about the outbreak while arresting and disappearing multiple whistleblowers.

Xing, the only way anywhere else is going to experience CCP-style government is if the PRC invades the place. No country, no self-governing territory, on the face of the earth wants a bar of it. And the more we see and hear about the CCP's 'strong and centralised government', the more the resistance grows. If it's New Zealand you're thinking about, it would mean shooting many tens of thousands, and putting many millions - separating parents and children, of course - into concentration/re-education camps. Are you up for this? Or are you some kind of fantasist who'd like to clap from the sidelines?

Agreed. Admins to stop his trolling please.

I could think of a few countries whose current dictatorship might beg to differ, and sadly a good many western governments would dearly love their Orwellian surveillance tech if only they could get away with deploying it unchallenged.

You've betrayed yourself already xingmowang.

Xingmowang aka Benny Hill in his hilarious stock Chinese persona ( for those old enough to remember his shows on tv).

Seriously, it is now quite clear that a young Chinese doctor at the Wuhan hospital called Li Wenliang (plus 7 more of his class mates from their university days) has become an instant hero in China for attempting to warn the authorities that he was sure a Sars-like virus had taken hold from what they were seeing in the hospital. The eight young doctors discussed the situation between themselves on Wechat (not sure of the spelling). The outcome of these chats led Li Wenliang to notify their concerns to the local health authorities. The authorities then came down hard on Li with warnings against spreading anymore "dangerous rumours", then arrested him. He must have already caught the virus because he ended up back in hospital as a patient. He soon died. There were huge waves of grief and he has now assumed hero status. The BBC has an excellent video on Li Wenliang on their website. So, the Chinese lost a MONTH in taking action against the virus, valuable time that could have been used to control the virus before it got out of hand.
This chain of events comprehensively condemns the authoritarian government of China without question. The local health authorities in Wuhan were too scared of the higher levels of government to allow Li Wenliang's concerns to be promptly dealt with.
I think it's time for Xingmowang (or his minder) to hang his head in shame and slink away.

I liked Xingmow input, because? the person clearly stipulated two phenomena:
1) 'Centralised strong govt. control'/Emergency decreed situation, for certain period of time - eg. banning people movements in/out, at terminals, ports, airports etc - The irony is don't do it against the Chinese, they need to be exempted as they will bring wealth to the world.
This is the year of 'pest' / China is already warned the world what Rats is all about.. where they came from, what they consume, how they breed & spread.
2) If cannot be at least a period of time? ..then like the big dude say, yo nation xyz join me, together we shall rule the world. You shall learn my only way the true way towards prosperity, with that there'll be no more labeling of Rats, pest - It's only US/We are the ruler here.. bhuua haa ha...haa - year of Rat shall be named year of Human nn nun nuu - kcing.

New Zealand may need some immediate stimulus in the very near future. Interest rate cuts have too much time lag to be effective. We need to be thinking about how to handle this now. New Zealand has 900000 community service cardholders. The majority of those people live hand to mouth. paycheck to paycheck. But giving those people cash directly to spend may not have the desired effect either. If they see the trouble ahead somehow make the wise decision to save it. Still, nothing happens in the economy. Epay Giftstation have a nationwide retail network for distribution of gift cards with lots of participating retailers for redemption. Why not say anyone with a community services card can have 1 x $1000 gift card (valid for one month) for one of the "suitable" retailers. You must show the CS card to get the gift card. Each transaction is recorded in a central web-based database (to be developed) by the retailer. So 1 CS card number can only ever get 1 x gift card. The government picks up the tab for each card given out. 900000 x $1000 = less than a billion for instant stimulus to the retail sector that will flow into the rest of the economy. Yes, I can see the holes in this. Yes, there would be some people who take the piss. But the vast majority of people would take the money and spend the money. Buy groceries, buy clothes, buy a new fridge. We don't give a. Just buy something.

I have just been listening to a press conference from Washington, King County I think it is. All the heavies from the local medical fraternity. Quite enlightening. 6 are dead. From the age 50 up. Its been there a while, they werent allowed to use their cv tests for these people till recent days. They expect it to be well ensconsed in the community. The hospital is struggling to cope now, so they envision rough times ahead. Most people will sail through this disease. But those that are sick are very sick.
Soon there will be so many with it all the contact tracing they are doing now will stop. I was trying to do the dishes while listening and missed some key points, numbers etc. But the gist seemed to be its way out of control. Its a lot worse than flu for a distinct proportion of society. Please dont go to work if you think you have it. And it will kill a lot of old folk. And this will likely be with us for all time now.
So pretty much as expected, except the bit about how advanced it has got in the community with no one really realising until recently.

This has been well & truly media'd. To death in fact. This is a flu. No we don't have a vaccine. Yet. It will pass.
But by jingo's we have really talked ourselves into this. This is not the end of the world. This is the end of globalisation as we know it (& about time too). But please, please, please, do not believe everything you hear & see on television. They just love it when they can peddle their fears like this. Do not buy into it. Be sensible. Be smart. And don't be stupid. You will be fine.

Actually what these frontline ppl are saying is it wont pass. Who has shares in Ryman?

In that a vax is not a certainty. No vax. Big problemo. Unless this thing takes a dive of its own accord.

This is not a flu!

Coronavirus hospitalises 20% of those infected, whereas the flu is less than 1%. Hopitals will be overwelmed

The death rate is at least 14 x higher than the flu

Yeah will the stupid people please stop saying that this is the Flu, its not the flu for several reasons. Time you started watching Chris Martinson and checkout the numbers.

Well LJM - how about my little update here: it's an RNA characters buddy, the corona parts is very adaptable, the human protein that they attack vary a lot, the test of host? need to be multiple times just to confirm it, every 3-6hrs worldwide we got a new bulletin, this is unprecedented collaboration. YES amazing, but a Flu? you mean a flu with steroids? may be - for sure right now, those droplets easily transmitted between animal, human to human back to animal. It's characteristics if I may say.. was more intelligent than today's combined effort of world scientist, should I put the number of Phds, Profs that worked around the clock since Dec 31st? - the freakin' bug on that balance of scale is Wowing the other bugs..if you're young, most likely you're strong enough to be the carrier.. bring it to your old folks, then all those number of old? seems only have options of early detection, go to hospital ICU, isolation, LTVV, put into comatose, bed management & combo drugs, and hope for slow recovery.. man you should see the multiple computers to keep each vital organ functioning, some even survive with one computer left.. but honestly, Ryman healthcare hospital wings won't accept the left over care, hence? the quick pull of plug by Chinese authority - honestly, in microscopic level.. other bugs just say to this Covid19 - dude, how do you do it? - you're correct don't go to media - go to uni lab. hospital lab, vaccine makers lab, join the forum, get an update, videos, simulations.. man you'll be at marvel open up mouth.. and like me will say.. Wow.. what a little genius, intrepid traveler, adaptable to host protein, .. this bug really mimicking human behavioral in philosophical way. - We are into cold temp. now, I would be worried for our elderly demographics. - The rock star legends of this bug will be long lasting, ended for sure like the past legend - but it pave the way for future legend, and killing the legend is quite a task.

I do not think that either RBNZ or the government acting alone will be sufficient. The government can get cash into consumers hands and scale infrastructure spending to pull work into 2020. They also have the ability, as many other countries did during the last recession, to levy temporary taxes to maintain some fiscal balance. The reserve bank could change LVR rules on FTBs and newly consented dwellings. If inflation falls they could also move to government bond purchases to allow government the fiscal room to get projects underway.

Total killed, wounded and missing in WW1: 21 million
Total killed by 1918 influenza pandemic: 50 million

The reason we will muddle through this viral outbreak (probably) is because we take communicable disease seriously. Day in and day out even when there is nothing in the media.

It looks like the markets are recovering well. Seems investors see it as no biggie.

Just wait until this really kicks into gear in the USA. Its still early days that is the nature of something with exponential growth. If it really gets hold in the USA the fatality rate is potentially as high as 1.8 million people. This is a Cat 5 event the R0 is as high as 7. Bear in mind that a huge chunk of the poor population in the USA have no healthcare cover and cannot afford to even go to the hospital and you have a recipe for disaster. The USA is a very religious country so they had all better start praying.The mainstream media continue to downplay this and Doctors that cannot even put a face mask on properly have been giving advice.

I tend to agree with you Carlos67. How the Chinese markets are booming defies all logic, given their economy has effectively stalled.

But the moronic central banks will have a go anyway, and when the growth returns they willahve an inflation monster on their hands (sorry our hands) and interest rat rises needed to drain that are not allowed in a world where no one knows what a rise is in mortgage costs