March 17, 2021
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De-globalisation’s macro impacts

  • Globalisation in recent decades both lowered and flattened the Phillips Curve, making domestic inflation more dependent on the global rather than the domestic output gap.
  • We believe that the drive for supply chain security is pushing this process into reverse and that the post-pandemic world will have a higher and steeper Phillips Curve.
  • Inflation will be higher for a given set of unemployment data, especially if there’s a global schism. Policymakers will respond more to output and risk overstimulating.

March 11, 2021
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ECB: insignificant prevention

  • The ECB announced no policy changes while indicating purchases at a “significantly higher pace than during the first months of this year”. A low pace in January and excess within the existing envelope means the difference may not impact markets.
  • Rather than attempt to reverse recent moves, we see the ECB trying to discourage an extension, thereby preventing a tightening inconsistent with the outlook. It is such a weak form of guidance, though, markets may test its limits if the US move extends.

March 05, 2021
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Fiscal conquering monetary hegemony

  • The close relationship between national debt and wars is well-established. Although the current Covid crisis is not a war in the conventional sense, the government has extended its authority in a manner seldom seen outside a conflict situation.
  • War and similar crises shift the dial on economic policy towards a greater role for fiscal over monetary policy in demand management. In short, they push the envelope on what is thought possible and desirable vis-à-vis the role of the state.
  • Monetary policy’s space to stimulate is increasingly defensive as it accommodates fiscal stimulus up until the point it becomes inconsistent with the target. The fiscal hegemony is now de facto and de jure and this will determine relative economic performance.