Fiscal Power Unleashed?
A few years ago, ex Brazilian President Dilma Rousseff was impeached due to “fiscal crimes”. History seems to rhyme and it looks like COVID 19 has induced an important shift similar to what she did. I doubt that anyone will be really held accountable as her in the future but the mechanic is similar.
Why now? Since the GFC, QE and variations have been the main supportive engine (mainly for financial assets). However, we have a political shift towards Main Street. The present riots wave against racism is in my view just the tip of the iceberg. The wealth and income gap is historically very streched and politicians are getting worried.
MMT / Helicopter Money Think Tanks have gained influence and the unprecendent fiscal initiatives taken by governments due to COVID 19 are a direct response. Now, leveraging the fiscal power is maybe the most powerful shift to achieve nominal desired growth and …inflation. How? Loan guarantees!
The EU Green Deal, Trump’s Infrastructure plan and other initiatives are setting the regulatory framework. In my view, politicians across the ideology spectrum will have no problem in using their fiscal power to provide bankers and other financial intermediaries with the loan guarantees. The recipients will gladly accept such new “Master Deals”. Take the money, do what you are asked for and do not question otherwise you die.
The implications can bear long term effects for investors and are deep. Infrastructure will benefit but could inflation data and expectations shift too far and too fast? Is the “flations” debate over?
Maybe we will need to keep a closer eye on the following charts for a few years! (% yearly change of M2 and Money Velocity)
