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Update: Stimulus & Austerity

By beled | July 27, 2016

Extract from the June 2016 quarterly report:

Although the UK referendum vote to leave the European Union (“Brexit”) has been getting the headlines recently, the UK economy is less than 4% of global GDP. Of far more importance to the medium term outlook for global economic health is the stance of, and balance between, fiscal and monetary policies in the major economies. Over the past few years a serious mismatch between these two pillars of national economic policy has emerged, particularly in the Eurozone where fiscal restraint and austerity is being attempted against a background of high debt-to-GDP levels and aggressive quantitative easing (“QE”). George Soros has described the actions of US Federal Reserve chairman Ben Bernanke during the global financial crisis of 2008 as the right approach, contrasting this with that of Europe which he believes is in a deflationary trap. “Here you are caught in the unfortunate misconception about government debt. You need growth and then everything falls into place.” In other words, fiscal austerity is currently counter-productive and it would be better to reflate and grow out of the fiscal deficit rather than to trim government spending.

Brexit has been the catalyst (excuse?) for the UK to adopt easier fiscal policy. George Osborne, the UK Chancellor of the Exchequer (since replaced by Philip Hammond), was doing his best immediately after the “leave” vote to bolster confidence and enhance spending and the intention to balance the government’s budget by 2020 has been abandoned. With UK 10 year Gilt (Bond) yields falling below 1% and at 35-year price highs, it is currently very cheap to fund the fiscal borrowing requirement. The same applies in the US (chart 1):

Screen Shot 2016-07-27 at 3.24.18 PM


In addition to increased government spending, Osborne also made the case for a sharply lower corporate tax rate of 15%, already a matter of concern to Brussels who would much prefer less rather than more fiscal competition in Europe.


We feel that this trend is likely to extend to other major economies against a background of low growth and no inflation. If so, current stimulatory monetary policies would be supplemented by easier fiscal policies, redressing the balance between the two and enhancing global growth prospects.

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