A Seminal Moment?
Just as the stagflation of the early 1970s ushered in what became known as the Monetarist Counter Revolution of the late 1970s, the Global Financial Crisis of the late 2000s has apparently ushered in a Keynesian Counter Revolution of its own, or at least a return of 'Big Government' in many countries in the West.
Clearly, governments through their various spending programmes, nationalisation of institutions and most of all through their large financial deficits, which now exceed levels witnessed even in war-time, have returned to a degree of prominence not seen for at least a generation.
Funding these huge public deficits has, of course, involved the issuance of massive quantities of new government debt and so far this year it has been the global banking system - and primarily the central banks and the investment banks - that have funded by far the greatest part of the OECD countries' budget deficits. Quite simply, rather than 'real world savers' it has been the operation of the various iterations and versions of Quantitative Easing Policies that have allowed the fiscal largesse which governments have been able to indulge in over the last 18 months.
In short, governments have either been printing money themselves in order to fund their budget deficits or providing the wherewithal to investment and commercial banks to achieve this aim on their behalf. As the Bank of Japan noted in a recent conversation with us, there is little material difference between the central bank buying government bonds directly, or the central bank lending the necessary funds at extremely low interest rates to a troubled commercial bank that then buys the bonds for its own balance sheet (in fact, the only difference is that under the second option the commercial bank will gain the profits accruing as a result of the difference between the higher yields that it receives on its investments relative to the bank's subsidized cost of funds).
Whether this apparently easy funding situation for the governments can persist in the face of rumours of a global economic recovery and, more particularly, against the background of signs of a re-acceleration in inflation rates remains to be seen and, in many ways, this question may mark one of the most important moments for the global economy in recent times. If the governments were to begin to face funding difficulties, then we could envisage their counter revolution either stalling or perhaps reversing altogether, although we suspect that the private sector would also face some considerable fallout from such an event, given its still high dependency on cheap credit.
In fact, we suspect that few people currently realise just how dependent many parts of the world remain on cheap credit and we are somewhat dismayed to find that there remains a strongly-held belief amongst many investors with whom we talk that the world is somehow deleveraging. Although some US commercial banks may be slowly reducing the size of their balance sheets and US households have reduced a small portion of their outstanding debt burden over the last year, in general we find that private sectors around the world as well as the public sectors are still borrowing aggressively, with the result that debt ratios are still rising around the world.
Read the full Tyndall Comment.
Tyndall