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by Brunello Rosa
12 April 2021
During the Global Financial Crisis (GFC), central banks took centre stage in the policy response, while most governments opted for fiscal austerity, which made the economic contraction induced by the crisis longer and deeper than was necessary. Central banks deployed a number of innovative policy tools such as forward guidance, negative policy rates, credit easing, and quantitative (and qualitative) easing – in some cases accompanied by yield curve control. Especially with the adoption of large-scale asset purchases (LSAPs) the distinction between monetary and fiscal policy became quite blurred, yet a formal distinction was always kept.
Now, during the pandemic crisis, the real economic policy innovation has been the increased coordination between monetary and fiscal policy, intended to make sure that financial conditions always remain favourable. The coordination has been such that some economists have openly spoken about “helicopter money”, and central banks have re-started LSAPs, partly to monetise the huge deficits and debts that have been created to soften the economic impact of the crisis.
In the aftermath of the pandemic crisis, the role of central banks is destined to change further, and most likely will become ancillary to other government policies. In the last few decades, central banks have been asked to get inflation back under control as their primary objective. As a secondary goal, all central banks have the wider mandate of supporting government policies such as full employment and low long-term interest rates. (In the case of the Fed’s dual mandate, full employment and low inflation are equally important goals). To achieve this objective, central banks have been granted operational and, in some cases, institutional independence. Going forward, the situation will likely evolve further.
The main job of central banks in coming years will be to monetise the huge fiscal deficits and debts created during the pandemic, by adopting various forms of financial repression (including keeping long-term rates low for longer, with explicit or implicit forms of yield curve control). Controlling inflation will be less important: the Fed’s new strategy explicitly allows inflation to overshoot the target by a limited amount and for a short period of time, to make up for inflation undershooting during the previous few years. A limited amount of inflation accompanying a recovery in economic activity, along with some targeted tax increases, are the other two key instruments to “digest” the fiscal imbalances created during the pandemic.
Recently however, central banks have been given goals that typically belong to the government’s sphere, such as pursuing or accompanying environmentally friendly policies to counter climate change, as part of a broader push to achieve Environmental, Social, and Corporate Governance (ESG) objectives and financial sustainability. In this respect, the new remit of the Bank of England is the most advanced in the G10 area, with the ECB being a close second. In the case of the Fed, the FOMC has decided upon quality of employment (across states, social classes, ethnic groups and genders) as the key variable for its forward guidance.
Given these new goals, central banks will remain formally independent in most cases, but de-facto their actions will be determined by government policies. Governments will become the real centre of action in coming years, taking the baton from central banks. And perhaps, for this reason, some of the more notable central bankers of the last few years are now in government, or in similar positions. For example, the former Chair of the Fed, Janet Yellen, is now Secretary to the Treasury in the US. Former ECB President Draghi is now Italy’s Prime Minister (after being for many years Director General of the Italian Treasury). The former BOE Governor Mark Carney, who was also at the Treasury before joining the Bank of Canada, was recently appointed UN Special Envoy on Climate Action and Finance, and there’s speculation about him entering Canadian politics in coming months.
by Mirko Giordani
8 April 2021
by Alessandro Magnoli Bocchi and Fawaz Sulaiman Al Mughrabi
1 April 2021
by Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi and Karmen Meneses
4 March 2021
by Brunello Rosa and Nouriel Roubini
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17 March 2021
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by John Hulsman
7 April 2021
Introduction: The Paul Simon Theory Of American Foreign Policy
Don’t let all the vitriol surrounding American domestic politics fool you; in terms of foreign policy the US is adhering to the Paul Simon doctrine. As the great singer-songwriter put it, “After changes upon changes, we are more or less the same. After changes we are more or less the same.” Strikingly, regardless of party, so it goes for America’s view of its new superpower rival, China, as well as its view of geo-economics.
For there is genuine continuity between the party antagonists over both China and trade policy. Indeed, the great foreign policy sea change separating now from my glory days in Washington in the 2000s comes down to universal shift in how rising superpower China is viewed. Then everyone agreed with the Ralph Waldo Emerson theory of Beijing’s rise: “Every man is a conservative after dinner.” This meant China’s ascent should be seen as a benign thing, as its increased power and prosperity meant over time its middle class would grow, would demand pluralism, and as China became enmeshed in global trade the country would act as a responsible stakeholder, maintaining the global order that had brought it such prosperity.
Now absolutely no major political figure in either party holds this once universal view. Instead, Beijing is viewed by all with the greatest suspicion, with the rising superpower being seen as a revolutionary power, a threat to the continuance of the American-constructed global order it now wants to supplant. Both Democrats and Republicans agree that the key geographical space in this contest will be in the Indo-Pacific, home to most of the world’s future economic growth as well as most of the world’s future political risk.
Donald Trump provided the first building block for this unlikely consensus, pointing out consistently throughout his career that China’s predatory trade tactics made it a coming enemy of America. The Biden administration, far from repudiating Trump’s strategic insight, has instead built upon it, agreeing he is right, but that to best Beijing, America must use the advantage of its many alliances to do so. That is, while great power Russia may tilt toward China, the US has the luxury of possibly linking up with great powers the Anglosphere countries, Japan, India, and the EU as potential anti-China allies. If Trump identified the enemy for the new Cold War, the Biden White House is now providing the tactical outline for how the US can prevail in such a contest.
However, unfortunately, an American domestic political consensus has also grown around a more deleterious geopolitical tactic, that of pushing protectionism, rather than championing global free trade. Over free trade and tariffs, both parties have formed an unholy alliance. It is vital to remember that until the advent of Donald Trump—and his unfriendly takeover of the Republican Party political establishment—it was the GOP that was traditionally the modern party of free trade, while the Democrats were the protectionists. For example, the original NAFTA trade success in the Senate was sealed by Democrat Bill Clinton allying with a tidal wave of Republican Senators to get the trade measure passed; the political wizard Clinton received credit for NAFTA although it was passed with only minority Democratic support.
After Trump’s unfriendly takeover, the US is strikingly left with two protectionist political parties for perhaps the first time in its history; the general geo-economic policy trajectory cannot be in doubt until this basic political fact changes. The Democrats steady shift leftwards since the Clinton era has only solidified the Democratic Party’s protectionist instincts as its increasingly assertive progressive wing is deeply suspicious of free trade pacts as a trick perpetrated on the American working class to make plutocrats even richer. The rise of a populist GOP, coupled with an increasingly leftist Democratic Party, means that the protectionism of the Trump era is now the order of the day. So, for all the talk of political polarization between the two parties, the Paul Simon thesis in foreign and economic policy is holding: Both parties regard China as the geo-strategic enemy and both see protectionism as the geo-economic way forward.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com.
Week: 12 - 18 April 2021
The Week Ahead: Retail Sales To Ease in US And EZ, While RBNZ and CBT Are Expected To Remain On Hold
In the US, March’s retail sales are projected to expand by 7.9% y-o-y (p: 6.3%), while IP is expected to ease to -1.4% (p: -4.2%).
In the EZ, February’s retails sales are anticipated to ease to -4.7% y-o-y (p: -6.4%), and IP is seen increasing to 1.5% y-o-y (p: 0.1%).
In New Zealand and Turkey, both CBs are expected to keep their policy rates unchanged at 0.25%, and 19.0%, respectively.
Vaccination Campaign Reach 154 Countries, But Many Face Supply Issues; CBs To Maintain Dovish Tone
Over the next two years, the global economy is likely to recover faster than expected, as the US will lead both: 1) progress made in containing the coronavirus; 2) fiscal and monetary stimuli in most DMs. The IMF lifted its global growth forecast to 6.0% this year – the most since 1980 – compared to 5.5% projected in January. The upgrade in projections was boosted by: i) stimulus spending in advanced economies; and ii) accelerating COVID-19 vaccine rollouts.
Over the past two weeks, fewer than two million COVAX doses were cleared for shipment to 92 countries in the developing world. As many as 60 countries, including some of the world’s poorest, might see their coronavirus vaccinations deliveries – to be received through the global program – on hold until as late as June.
In the US, the COVID-19 new cases are trending upward and Public health officials have warned in recent weeks that “there could be another wave of the disease before the country reaches so-called herd immunity” — the point where most people have antibodies so the virus cannot easily spread.
Still in the US, the Fed chairman Powell: 1) urged all Americans to get vaccinated, as “the recent rise in COVID-19 cases in the country poses a risk to the economic outlook”; and 2) stated the Fed needed to “see actual evidence of a strong economy before it would consider pulling back” from its loose policy stance.
Amid rising tensions, the US state department issued new guidelines to ease “decades-old restrictions that have hindered meetings between US and Taiwanese diplomats”. China believes the US is colluding with Taiwan to: i) challenge Beijing; and ii) provide support to “those who want the island to declare formal independence”.
Real Economy: DM Composite PMIs > 50-Benchmark; CBs On Hold, Growth Rebound Ahead
In the US, March’s Markit composite PMI climbed to 59.7 (c: 59.1; p:5.95), signaling the fastest upturn in private sector business activity since August 2014, as: i) manufacturing PMI rose to 59.1 (c: 59.0; p:58.6), the second-highest growth in factory activity on record; and ii) services PMI rose to 60.4 (c: 60.0; p: 59.8), marking the fastest output growth since July 2014.
In the EZ, the Markit composite PMI increased to 53.2 in March (c: 52.5; p:48.8), signaling the second-fastest increase in private sector output in two-and-a-half years, as: i) manufacturing output grew by the most in nearly 24 years (a: 62.5; c: 62.4; p: 57.9); while ii)services output fell at the slowest rate in the ongoing seven-month sequence of contraction (a: 49.6; c: 48.8; p: 45.7). The seasonally-adjusted unemployment rate stood at 8.3% in February (c:8.1%; p: 8.3%), but the number of unemployed increased by 48k from the previous month, to 13.6m.
In Australia, the RBA left its cash rate unchanged at a record low of 0.1% during its April meeting, as widely expected.
Financial Markets: Major Stock Indexes Rally, To New Record Highs; USD Falls As Gold Rises
Market drivers: investors grew optimistic on: 1) a global economic rebound; and 2) rising earnings, spurred by both the US fiscal stimulus and dovish CB policies.
Global equities rose w-o-w (MSCI ACWI, +2.0%, to 695). In the US, the S&P 500 Index hit a new high (+2.7%, to 4,129), driven by expectations of a swift economic recovery. In the EZ, shares rose to record highs (Eurostoxx 50, +0.8%, to 3,979) on economic optimism.
Fixed Income: w-o-w global bonds remained flat (BAML Global, 0.1% to 292.2), as the yield on the 10-year UST fell slightly (-1 bps, to 1.67%).
FX: w-o-w, the USD fell against other currencies (DXY, -0.9%, to 92.163; EUR/USD +1.1%, to 1.190).
Commodities: Industrial metals prices will likely fall from multi-year highs, as China’s stimulus is withdrawn. Oil prices fell (Brent, -2.9% to 63.0 USD/b) amid concerns about the pace of recovery in demand. Gold rose (+0.8% to 1,743 USD/Oz), the first rise in 3 weeks, as both the USD and 10-year UST yields retreated, and initial jobless claims unexpectedly rose for the second week.
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