Issue 90

It has been a long five months

Delivered on 07 December 2020 by Justin Pyvis. About a 3 min read.

How the world has changed. I'm not going to attempt to cover everything that has happened since the last issue, but there are a few items that stand out.

First, the good.

US President Donald Trump failed to eliminate Section 230 and won't get another opportunity to undermine online free speech. As an added bonus, he decided to veto a bloated military bill out of spite. A double win!

Then there's the fact that the human race has managed to concoct not just one but four COVID-19 vaccine candidates in record time - we're talking less than a year from conception to delivery. Better yet, two of the more promising use messenger RNA technology never before seen in a commercial vaccine for humans and may have implications well beyond COVID-19. How good is that? With any luck, life will return to something resembling normal within a year.

Now, the (much more extensive) bad.

The coronavirus is still running rampant through most parts of the world, as people suffered pandemic fatigue and couldn't possibly skip that European summer vacation or Thanksgiving travel, even with a vaccine only months away. The United States is now facing its biggest wave of the virus to date:

In response, governments and central banks around the world have again pulled out the Keynesian playbook, responding to what is mostly a supply shock by trying to stimulate demand. That has caused asset prices to go ballistic, in large part because much of the stimulus is finding its way to relatively affluent people working from home, consuming less (i.e. saving more) and able to borrow significantly more:

"Buoyed by record-low borrowing costs, average house prices [in New Zealand] surged an annual 8% in October. It’s a dynamic that’s emerging in other countries — even those that are yet to get the pandemic under control. U.K. prices hit a record even as it braced for new restrictions. In the U.S., house prices posted the biggest annual jump in seven years in the third quarter. Meanwhile in Australia, home prices rose for the first time in six months in October." Source.

Among advanced economies, coronavirus-related fiscal spending ranges from over 20% of GDP in Japan to a more conservative but still large 9% in Germany. That will, at some point, have to be repaid. It's also unlikely to come with the future productivity benefits that other types of government spending can typically have (e.g. certain infrastructure). It might also create some inflationary pressure once people are able to actually spend it on various consumer goods and services again. More on that below. 👇

The fiscal response has been more than matched by monetary policy, which is what's really driving asset price inflation in everything from Tesla stock to Kiwi houses and even cryptocurrency. A quick look around the world will show you that Canada's central bank increased its balance sheet five-fold; Australia's two-fold; the US' 70%; the euro area's 50%; and Japan's 25%. All in the span of a few months. What could possibly go wrong?

Don't expect anything to change soon, either. Central bankers have been very vocal about suppressing interest rates for, in some cases, up to three years. Whether they'll be able to achieve that stated goal is another question, but you can be sure they'll try for far longer than they should.

But the sheer amount of demand stimulus being injected into the global economy can't go on forever and when it turns, it'll turn quickly. As Hemingway wrote in The Sun Also Rises, you go bankrupt in two ways: "Gradually, then suddenly." That's probably how the latest global debt adventure will also unfold: first with asset price inflation, then with the wealth effect pushing up consumer price inflation, then finally with a sudden crisis as markets, central bankers and governments eventually realise their errors (far too late).

Unfortunately, the madness may continue for much longer than you expect (such is the nature of credit booms).

Issue 90: It has been a long five months was compiled by Justin Pyvis and delivered on 07 December 2020.