President Biden’s gamble is based on Franklin’s Roosevelt’s war economy from 1941-1945, not the New Deal of the 1930s.
The idea is that if you “push down on the economic accelerator” you discover hidden slack. Added demand creates its own added supply.
Even Olivier Blanchard, the high priest of stimulus, is choking on the numbers. He warns of a ‘nonlinear’ effect where inflation suddenly breaks out, akin to the late 1960s.
Roosevelt’s military-industrial expansion tightened the labour market and lifted wages, leading to the most dramatic fall in income inequality in US history. It ushered in the ‘social democrat’ era of the American Dream. It is this that Mr Biden aims to replicate.
The twin effect of a rising dollar and rising US rates is to drain global dollar liquidity. This has systemic consequences in a world where offshore dollar debt has reached $12 trillion and trade invoicing is still done mostly in US currency. The IFF warns of another ‘taper tantrum’ akin to the global sell-off in 2013 unless bond yields stabilise soon.
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