Thread by @edwardnh, Policy makers are cottoning onto the core framework that @RaoulGMI laid out [...]

Policy makers are cottoning onto the core framework that @RaoulGMI laid out in April and was presented on @RealVision on Apr 8

See "The Unfolding" here https://www.realvision.com/shows/the-expert-view/videos/the-unfolding /1 https://twitter.com/RaoulGMI/status/1338575606955520002

My interpretation of what Draghi and Rajan and co. are saying is this - and it echoes the Unfloding framework:

1. We are in the midst of a global business paradigm shift, where on the other post-vaccine side of things, life will NOT be as it was before the pandemic. /2

First there was a liquidity crisis in March as the pandemic hit. But we know how to deal with that, especially given our moves during the Great Financial Crisis and the European Sovereign Debt Crisis /3

Then, there was the 'hope phase', where people hoped for things to return to the status quo ante. Now that we have the vaccine, this hope has reached a fever pitch, with crisis-hit and crisis-resistant IPOs doubling in value - big speculative signposts /4

But - and this is what Draghi and co. are saying:

2. there is a solvency crisis awaiting us, not just because of the pandemic, but also because the world has changed forever now. And we're dealing with this with more private and public debt than ever before /5

Their solution:

3. "Carefully target public support to optimize the use of resources and help economies emerge fitter and stronger."

TRANSLATION: use fiscal support /6

But: 4. "Adapt to the new business realities, rather than trying to preserve the status quo."

TRANSLATION: This is not just about the pandemic. Some of these are permanently changed realities and many, many businesses will fail- @RaoulGMI calls the Insolvency crisis /7

KEY: 5. "Market forces should generally be allowed to operate, but governments should intervene to address market failures that create substantial social costs"

My interpretation: Let businesses fail but don't let the insolvency crisis get out of hand. Intervene in extremis /8

My view: this is NOT a recipe for high real GDP growth and/or inflation. You have a massive labor market and business formation transition to make. And the only thing to prevent crisis is government intervention. /9

I know people think political resistance to deficit spending has evaporated. I don't think it has. Germany is not doing 100% government debt to GDP. Italy won't be allowed to get to 200%. The Eu won't be allowed to take on massive eurobond debts /10

In the US, Republicans and the like of Joe Manchin will squash massive new deficit spending. Even Biden and Pelosi are likely to want tax raise offsets from the wealthy.

So, unless you think redistribution is what gets you high nominal GDP growth, it's not off to the races /11

Bottom Line: everyone is bulled up on the vaccine. Meanwhile we have an acute pandemic wave to deal with and long-term costs from a global business transition to deal with. Political will is not expansive enough to deal with that over a 3-, 5- or 7-year time horizon

/end

Addendum: quotes from here the Group of Thirty here. https://group30.org/publications ht @DionRabouin

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