As financial markets slip through the cracks of monetary policy every hour and twist away from major central banks, some rational investors are missing out on a broader picture of economic policy that will shape the years to come.
One of the main themes of the previous decade of the epidemic was that Western governments relied heavily on their central banks for financial assistance – preferring a policy landscape that kept the purse strings relatively tight when rates fell. The real interest was less to support and avoid demand Inflation
In the two years since the outbreak of COVID-19, all this seemed to be the opposite. Governments have blown up banks to keep the economy afloat through lockdowns, deficits and rising debt levels, and central banks have effectively underrooted necessary additional loans at zero rates and with the obligation to purchase loans.
But as growth, jobs and inflation return to strength, questions have been raised about how long the financial horsepower will last in the face of ongoing interest rate cuts – especially if interest rates last longer and savings close sharply again.
Last week, the non-partisan U.S. Congressional Budget Office unveiled what at first glance seemed to be a dramatic repair of national accounts at the pre-epidemic level.
Thanks to tax revenue growth as the U.S. economy recovers, the CBO says the national budget deficit will shrink to more than 1.7 trillion from 2021 this year, down 3.9% of GDP from last year’s impressive figure of 12.4%, then 3.7% in 2023. %.
A welcome move, at least for the Treasury bond market, which is preparing itself this week to begin pruning its bloated balance sheet of U.S. debt accumulated during the Federal Reserve epidemic.
But the CBO’s 2022 surprise masked the deteriorating financial situation over the next decade because decisions had already been made – and because of rising interest bills.
He now expects the widening budget deficit from 10 years to 2031 to be আরও 14.5 trillion, a further 4 2.4 trillion from last July’s forecast.
And the federal debt interest charge is expected to double to 3.3% of GDP by 2032, pushing the debt-to-GDP ratio to a record 110% with an average interest rate of 3.1%, compared to an average of 1.9 this year, up from 98% this year. With%.
Chart: IMF Chart of Global Fiscal Gap – https://fingfx.thomsonreuters.com/gfx/mkt/zgpomelampd/One.PNG
Chart: G7 10-Year Real Yield – https://fingfx.thomsonreuters.com/gfx/mkt/lbvgndyjbpq/Four.PNG
More “Great Conscience
The U.S. mega-fiscal stimulus is now stuck due to overheated economies and congressional fears of nearly 40-year inflation rates, and those who argued for some fiscal restraint seem to be right, as the Fed prepares to tighten credit.
Former Democratic Treasury Secretary Larry Summers, for example, reiterated his caution about fiscal policy last week, saying the Federal Reserve is slowly taking control. However, he noted in an interview with The Economist that every time in the last century, US inflation has been above 4% and unemployment has been below 4%, following a recession in two years.
And yet, given Russia’s invasion of Ukraine and subsequent sanctions pushing for more energy this year, a new tax relief may be needed to affect household incomes around the world – an additional £ 15 billion ($ 18.92 billion). Government support for families announced by the UK last week.
How these fiscal and financial levers are configured tries to calculate both the most important issues for investors where the real interest rate is fixed and how the savings absorb the effects.
Pascal Blank, president of the Amundi Institute, believes that the period of complementary monetary and fiscal policy, which he called the “Great Consensus”, is now over and that more difficult discussions and coordination of action are taking place between those responsible for economic policy.
The optics of Tuesday’s highly choreographed meeting between U.S. President Joe Biden and Fed Chairman Jerome Powell will not go unnoticed, with the public’s priority at least reducing the high cost of living.
Mr Blank believes that markets are now leaning towards further monetary expansion and a complete “normalization” of monetary policy. But he calls this last point a “fiscal space killer” and thinks the big risk in this panorama is that the economy falls between the two chairs and a recession or stagnation occurs, leading to further decline of wealth. Risks like stocks.
In a situation where central banks allow for more monetary measures – in both Europe and the US – there is probably more potential, he concluded, adding that it should link portfolios to assets that more or less protect against high inflation.
“‘Fiscal space’ will be used to deal with critical new sets of public goods, especially change of power or social and strategic autonomy,” Blank wrote. “Central banks need to cooperate and adapt to these priorities.”
Graphic: CBO estimates for 10 years US budget deficit – https://fingfx.thomsonreuters.com/gfx/mkt/akvezryeqpr/Two.PNG
Chart: CBO Long Term US Government Debt Estimates – https://fingfx.thomsonreuters.com/gfx/mkt/byvrjdnmrve/Three.PNG
The author is the chief financial and market editor of Reuters News. All opinions expressed here are his own.
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