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Roughly every 15 years since the 1930s, Britain has had an autumn financial crisis that has foreshadowed global upheavals a few years later. The recent near-collapses of the pound, the UK’s government bond market, and its pension system are likely to echo around the world in unexpected ways.
According to conventional economic thinking, incoming British Prime Minister Liz Truss’s economic experiment with borrowing and spending will produce disaster. But, given how mysterious stagflation is, Truss’s unorthodox response to it should not be dismissed out of hand.
Markets and central banks confidently expect a comfortable new “Goldilocks” era for the global economy that will allow everyone to live happily ever after. But investors’ sanguine outlook rests on four cognitive biases.
This week in Say More, PS talks with Anatole Kaletsky, Chief Economist and Co-Chairman of Gavekal Dragonomics.
According to conventional wisdom, US President-elect Biden will find himself immediately paralyzed because Republicans will follow the same obstructionist playbook they used to sabotage Barack Obama’s administration. But there are five new features of US political dynamics that this argument has overlooked.
The proposed sum for the recovery fund proposed by French President Emmanuel Macron and German Chancellor Angela Merkel is small change in an era when politicians and central bankers conjure up trillions almost daily. But, if adopted, the proposal might be remembered as the moment when Europe became a genuine political federation.
Based on China’s experience with COVID-19, the fiscal cost of comprehensive compensation for lost income could reach 10% of annual GDP, and as much as 25% of GDP in the US and Europe if the epidemic turns out to be worse there, which now looks likely. These may seem like mind-boggling sums, but they can be financed in several ways.
Callous as it may sound, the economic and political impact of the coronavirus pandemic will ultimately be determined by the epidemiological and clinical data. Fortunately, in this case, the relevant statistical trends are developing in a much less alarming way than panicked media headlines might suggest.
The most probable scenario for the global economy and financial markets this year is fairly obvious: continued GDP growth, rock-bottom interest rates, and rising equity prices. It's more useful to identify which unlikely events would alter this likely benign scenario – and consider how unlikely they really are.
With the United Kingdom’s withdrawal from the European Union now set to take effect on January 31, 2020, the most important challenge facing UK Prime Minister Boris Johnson is negotiating his country's new relationship with the bloc. He has every incentive to keep that process as non-controversial as possible.