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2020-

2020-08-24 d
The Coming End-Game

"It's Getting Worse With Every Shock" - One Bank Turns Apocalyptic On The Coming End-Game

In what can be described as Bank of America at its most apocalyptic, the bank's currency strategist Athansios Vamvakidis takes us on a tour de force of where we've been, going through what comes next, and which culminates in what may well be the 9th circle of financial hell.

Starting with the "three red flags" that have recently emerged across global economies, he then explains why nobody cares and why "markets remain optimistic" - the reason is MMT, in case anyone is confused - as "deflation and not inflation is the risk today." As a result, nothing "prevents more fiscal policy stimulus, funded by more money printing" while "central banks keep policy rates low for as long as necessary, to help governments deal with the massive debts they are accumulating? Effectively, this is what markets are pricing in" as without inflation there is no "budget constraint."

Yet stocks at all time high does not mean the situation is sustainable: as Vamvakidis writes next "things could have been different if the pandemic had found the global economy with lower debt and higher interest rates" however, that is a pipe dream as "most countries did not take advantage of the good times in the years before to create enough policy space, just because they thought that these years were not "good enough." In fact, in a complete failure of following Keynesian principles, "macro policies since the late 1990s have been loose in good times and even looser in bad times" as "countries have been converging towards MMT, without even realizing that they do" and the result "is that policies were loose and debt high even before the pandemic." Covid only accelerated this trend.

So for now the world is cruising on a debt-fueled autopilot, and "as long as there is no inflation, there is no budget constraint, in MMT and in the current state of the world. For as long as the pandemic lasts, fiscal and monetary policies can provide as much support as necessary and even more." Furthermore, looking ahead in a post-covid world, there will be "no rush to tighten policies, to avoid jeopardizing the recovery, as was also the case in the years following the global financial crisis. After all, Japan has been in this reality for the last 30 years."

Of course, eventually these loose macro policies, in both a good and a bad state of the global economy, "will likely lead to inflation. (read more)

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