Growth, Inflation & Policy
- U.S. real GDP growth is expected to have dropped 2.4% year-over-year in Q4 and 3.5% for the full year. It is expected to bounce back by 5.2% in 2021 (Bloomberg).
- The significant damage to the private sector and fact that fiscal multipliers are generally negative, especially in highly indebted countries, means that real (inflation-adjusted) growth is going to be become increasingly harder to achieve.
- While current inflation is relatively low, long-term inflation expectations have continued to trend higher. The 10-year TIPS-implied inflation rate is currently 2.1%, near a 7-year high.
- Economic slack, continued technology adoption and excessive debt levels will act as a damper on inflation until MMT-inspired “helicopter money” becomes ongoing policy.
- On balance, we expect inflation to trend higher in fits and starts (higher lows and highs) in coming years.
- To date, fiscal stimulus has been more reactive (replacing lost income) than proactive (stimulus).
- We believe policy will start to become more proactive and supportive/ distortive for at least three reasons:
- Single party control of the U.S. government
- The de facto merging of the Fed and Treasury
- The Covid-19 crisis removing social and political pushback to government spending and bailouts
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