It’s probably not a stretch to suggest that outside of some unforeseen mutation in COVID-19 or another left-field event, the biggest worry for the global recovery is that policymakers will fall back into the trap that undermined economies in the post-financial crisis era.
If developed world politicians, in their infinite wisdom, fall victim to misguided rhetoric about the purported “necessity” of austerity following periods of big government spending, thereby putting the onus for sustaining the recovery squarely on monetary policy, the results will be just as predictable as they will be unfortunate.
This is a lesson we should have learned by now. But we haven’t, mostly because lawmakers in advanced economies persist in parroting manifestly false notions about government financing.
The public inexplicably accepts the rhetoric as gospel, despite doubting virtually everything else that comes out of politicians’ mouths. (It’s really quite something — tell the average voter that the US government doesn’t actually need to tax or borrow to spend, and you’ll be scoffed at, but tell that same voter there are no aliens at Area 51, and they’ll say “Are you sure?”)
In any case, a constant theme in these pages goes something like this. If DM governments refuse to countenance a sustained fiscal impulse in the interest of supporting a durable recovery, monetary policy will be forced to shoulder more of the burden, resulting in “weirder” experiments in negative rates and asset purchases. That, in turn, will perpetuate bubbles and exacerbate inequality. We’ve already seen this movie. It just played.
So, what does the future hold?
Well, in all likelihood, the same misguided notions around fiscal policy will persist, and politicians will look to rein in spending and cut debt. Almost everyone will find their inner budget hawk. Central banks will keep buying assets and keep rates glued to the lower-bound, resulting in more bubbles and a wider wealth gap until, at some point, the perpetually beleaguered public decides enough is enough and elects a real “radical,” not just some well-meaning progressive that conservatives equate with radicals for political gain.
Between now and when the downtrodden masses finally wake up to problem (which, again, is just as much about misguided notions around public spending in advanced, currency-issuing economies as it is about the desire to protect wealth and the status quo) we’re likely to see sub-par growth and lackluster inflation. Just like we did post-GFC.
JPMorgan analysts, in a new cross-asset strategy outlook, wrote that if the bank’s calls on the economy and policy in 2021 are correct, “the year ahead could deliver the strongest growth and the fewest geopolitical shocks in a decade.”
That’s the good news. And while the bank doesn’t use the word “bad,” I’d submit that a short paragraph outlining their expectations for the fiscal-monetary conjuncture highlights the risks mentioned above.
As noted last week, JPMorgan expects the US to contract in the first quarter, but after “virus-related stumbles” stateside and in Europe, the bank says the global economy should “segue into a mini-boom of roughly 5% year-on-year growth due to easing of lockdowns, US fiscal stimulus, and vaccine-related activity normalization.” For what it’s worth, they expect another $1 trillion in stimulus from the US, approved sometime in “late” Q1.
That pace — 5% — would be nearly double trend and mark the briskest clip in some ten years.
But there’s a problem. “Such strength would be insufficient to close the global output gap,” JPMorgan went on to say.
Specifically, the bank expects “the level of global GDP to remain about 3% below its pre-crisis trend, which represents a larger shortfall at a similar stage of any recovery over the past 50 years.” Little wonder, then, that their forecasts call for below-target inflation across all DM economies and China in 2021.
The bank drives the point home. “It’s helpful that almost all central banks have committed to easy money until inflation rises near target or even overshoots, but with monetary options limited and fiscal policy delivering drag of 2% of global GDP next year, meaningfully higher inflation is [more] a risk scenario than a baseline,” they added.
What do you get when you have fiscal drag and monetary largesse (albeit to a lesser degree than the wide-open spigots from 2020)? Well, you get economies that aren’t performing in line with their potential, juxtaposed with financial asset price inflation.
Initially, this will be a kind of “super Goldilocks” as the rebound in growth materializes, but if fiscal policy remains a drag, that won’t last beyond the mechanical bounce.
For markets, it’s great. “Strong growth, tame inflation, cash rates at or below zero and trillions of dollars of central bank liquidity seem blissful for markets in general,” JPMorgan said.
And yet, over the longer-term, a policy conjuncture where monetary measures are expected to do the heavy-lifting while lawmakers and the general public lie to themselves about what is and isn’t “affordable” in terms of government spending, will just create more inequality, widening societal rifts in the process. Central banks will be blamed. Nobody will fault lawmakers and voters won’t take the time the learn any better — mostly because they’re too busy working three jobs to put food on the table.