The Pivot To Fiscal?

Sep 15 13:09 2019 Print This Article

The final Mario Draghi press conference had him underlining the importance of fiscal policy. Since I am supposed to be working on my slides for my presentation in the panel "MMT: Who is Listening?", one might argue that it looks like a lot of people. However, it is unclear how significant the shift in opinion is from a practical perspective.My long-held argument is that the only way we will get a secular bond bear market is a switch towards fiscal activism. (Note the word "secular", we certainly can have cyclical bond bear markets.) The usual conventional policy prescription, which would be to use non-targeted aggregate demand management (across-the-board tax cuts, mailing everyone a cheque, whether it is a universal basic income or "helicopter money") is going to generate the most nominal demand for the least amount of job creation. One might imagine that such policies would be inflationary, as was argued in the 1960-1970s. (Disclaimer: I am not interested in debating what the "true" cause of the 1970s inflation was, I am just noting the arguments made by Minsky, and presumably others.)As a result, for anyone interested in bond market economics, a shift towards fiscal activism needs to be on the analytical radar. If I had any commercial sense whatsoever, I would be pounding the table that bonds are doomed, and telling people to buy premium-priced books on how to survive the coming bond apocalypse. Unfortunately, I do not see any particular need to be excited about these developments.In the absence of a recession, at most we will see some countries launch relatively tiny fiscal stimulus packages. It is a good bet that any fiscal packages will have a low multiplier, as was the case for the Trump tax cuts. However, these will be at least partly offset by the drag of negative interest rates. The drag comes from two channels: the loss of interest income from government bond holdings, and the disastrous effects that low discount rates have on pension funds and savers.In the absence of a recession, it is hard to see how fiscal stimulus is a political winner in the Euro area. Governments still face treaty restrictions on debt and deficits, and they have seen how European institutions crucified Greece. Meanwhile, macroeconomic objectives have been redefined to only look at the inflation outcome. Telling people that the inflation rate ought to be 2% instead of 1.5% is not going to drive a lot of support for a political programme.The difference might show up in a recession; there might be a greater willingness to increase spending in a downturn. However, it is a near certainty that once the dust settles, fiscal conservatives would use the increase in government debt levels that is an inevitable consequence of the automatic stabilisers as a reason to cut welfare state spending. They are not going to care what some liberal-left academics or central bank economists say.In summary, I would argue that the sclerotic growth of the developed economies is the result of a wide range of policy decisions, as well as structural forces like the drag from the baby boom generation and the rich hoarding financial assets. A greater willingness to mail cheques to people during a once-per-decade recession is not going to move the needle versus those forces.MMT Navel-GazingFrom a Modern Monetary Theory (MMT) perspective, this creates a bit of a marketing problem among the broad public. Since the prominent neoclassical talking heads are no longer arguing that monetary policy can solve all macroeconomic ills, an easy point of differentiation is gone. Instead, one is stuck with a less attention-getting narrative: "Sure, we agree that fiscal policy ought to be emphasised more, but the proposed policy programmes are structured badly." Since nobody has a good model that can accurately predict the outcomes of the programmes, that is a harder story to sell. The neoclassicals will "win" purely by relying on society's deference to credentials. Furthermore, a good portion of the political spectrum will ignore this debate as being yet another left-wing internecine squabble.The alternative is to push a policy programme that is associated with MMT, such as a Job Guarantee. However, my argument is that politics is about coalition building, and the reality is that it would need to drag along a wider group of supporters. As a result, I expect that a Job Guarantee would need to be "discovered" to be implied as a "optimal policy" by neoclassical economic theory in order for it to be an easy sell.Conversely, the theoretical squabbles between MMTers and neoclassicals will remain of interest to the tiny portion of the population that has an interest in economic theory. For a lot of that audience (such as fixed income analysts), there is a professional bias to stay away from political economy debates. However, the way in which MMT needs to be marketed to such people is quite different than it would for political activists. (To what extent my presentation will have a theme, that is probably it.)(c) Brian Romanchuk 2019

Read More

About Article Author

Bond Economics

Bond Economics is about economics and finance, viewed from the point of view of a fixed income quantitative analyst. The site offers commentary about market trends, but does not offer investment advice. The objective is to look at what are the driving forces in the developed economies and markets, looking through the short-term distractions. There are also articles written to explain how to to develop models to analyse economies or fixed income securities. Author, Brian Romanchuck is a consultant and on the Advisory Board of the Global Investment Strategy Institute (link). Previously, he worked at the Caisse de dépôt et placement du Québec from 2006-2013, starting as an analyst and ending as the head of the Fixed Income Quantitative Analysis team. From 1998-2005 he worked at BCA Research, an economic research firm based in Montréal. He has a doctorate in control systems engineering at the University of Cambridge, after a bachelor's in electrical engineering at McGill University. In addition, he held post-doctoral positions at Cambridge and McGill before moving to work in finance.

Related Items

5 Investment Strategy Tips for the Soon-To-Be Retired

By Karin Mizgala, Co-Founder and CEO Money Coaches Canada It’s not uncommon for folks approaching retirement to think that retirement planning is finally behind them. They’ve put in the years of saving and investing; now it’s time to Google hotels in Santorini, Greece, right? Well it is, and ...

Market Update. Trade optimism & rate cuts rally global equities in September

The month at a glance All WealthBar equity weighted portfolios ended September higher after a volatile month in August. Markets rallied as the US-China trade talks started to appear more optimistic and both the European Central Bank (ECB) and the US Federal Reserve (the Fed) introduced key rate cut ...

US Open – China GDP falls to 6%, Turkey’s win, Brexit Vote looms, Oil rises, Gold stuck in range

US stocks and the dollar little changed in early Friday trade despite a worse than expected third-quarter GDP reading from China and heightened uncertainty regarding how Brexit will unfold over the weekend and a temporary cease-fire between Turkey and Syria.  Asian markets sold off after China’ ...

CWS Market Review – October 18, 2019

“There is nothing more deceptive than an obvious fact.” – Sherlock Holmes This week, our two Buy List bank stocks rallied after reporting better-than-expected earnings. Signature Bank gained 1.9%, and Eagle Bank rose 1.4%. At one point, Eagle was up more than 11% on the day. I’m especially ...

Private Equity Booms, Hedge Funds Wane?

Christine Idzelis of Institutional Investor reports that private equity changes everything:Private equity is too big to ignore — for both investors and regulators.“It’s critical,” said Peter Witte, associate director of Ernst & Young’s private equity group, in a phone interview. “If you ...

The Conservative Platform – Tax Cuts for the Affluent, Austerity for the Many

The Conservative platform put forward by Andrew Scheer delivers tax cuts for the relatively affluent, to be paid for by largely unspecified cuts to spending on social programs and public services. That is a poor deal for ordinary working families who get much more each year in program benefits lik ...

Those Gosh Darn Millennials

The recent article "Why are Millennials So Unfazed by the National Debt?" by Stuart M. Butler caught my eye. This light-weight article was beaten up on my Twitter feed, but I think it does appear to offer some insights in how the the changing media environment has changed how the younger generation ...

Tech Talk for Friday October 18th 2019

  European and Emerging Markets move higher Short term breakouts by the Eurozone ETF and the Emerging Markets ETF! Weakness in the U.S. Dollar contributed to their strength   StockTwits released yesterday @EquityClock India ETN $PIN moved above $24.49 extending an intermediate uptrend. Blackro ...

Buy Neptune Wellness Solutions for a double: Echelon

With its extraction operations now up and running and multiple supply agreements in hand, investors should be thinking about Neptune Wellness Solutions (Neptune Wellness Solutions Stock Quote, Chart, News TSX:NEPT), says Douglas Loe, analyst for Echelon Wealth Partners. On Wednesday, Loe provided c ...

Fickle Market Tempers Enthusiasm

Overview: Fading hopes that a Brexit agreement can be struck is seeing sterling trade broadly lower, while China's demand that US tariffs be rescinded in exchange for a commitment to buy $40-$50 bln of US agriculture goods over two years, makes the handshake agreement less secure. At the same ...

The Drilldown: Trade war jitters

The Lead Lingering trade tensions between the U.S and China continue to affect commodity prices, with the price of benchmark Brent crude dropping US$1.04 to $58.31 a barrel and U.S West Texas Intermediate crude falling US$.98 cents, to US$52.61 last week, the Reuters reports. Although U.S President ...

Ivanhoe encouraged by rise in palladium price

Ivanhoe Mines’ (TSX: IVN) co-chairmen Robert Friedland and Yufeng “Miles” Sun issued a communiqué this week stating that recent increases in the price of palladium, nickel, rhodium and gold have resulted in the weighted price of the ‘basket’ of metals contained in the ore at the company ...

NEGATIVE RATES ARE KILLING THE WORLD

NEGATIVE RATES ARE KILLING THE WORLD October 18, 2019 by Egon von Greyerz “BREXIT, is in the last innings, UK will get out” – This is how Egon von Greyerz starts the interview with Eric King of King World News. Egon goes on to say that in the long run the EU will dissolve, country after ...